REG - Mears Grp PLC - Final Results
11/04/2024 07:00
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RNS Number : 2455K Mears Group PLC 11 April 2024
Mears Group PLC
("Mears" or "the Group" or "the Company")
Preliminary Results for the year ended 31 December 2023
Strong financial and operational performance with positive trading outlook
Mears Group PLC, the leading provider of services to the Housing sector in the
UK, announces its preliminary financial results for the year ended 31 December
2023 ("FY23").
Financial Highlights
FY 2023 FY 2022 Change
Revenue (£m) 1,089.3 959.6 +14%
Profit before tax (£m) 46.9 34.9 +34%
Statutory diluted EPS (p) 31.94 24.51 +30%
Adjusted diluted EPS(1) (p) 31.24 24.69 +27%
Dividend per share (p) 13.00 10.50 +24%
Adjusted net cash(2) £m 109.1 100.1 +9%
Average daily adjusted net cash(2) (£m) 76.5 42.9 +78%
· Group revenues up 14% year-on-year to £1,089.3m (FY22:
£959.6m).
· Profit before tax increased by 34% to £46.9m (FY22: £34.9m).
o Adjusted operating margin continues to strengthen to 4.7%(3) (FY22: 3.7%).
· Excellent cash performance with average daily adjusted net cash
of £76.5m (FY22: £42.9m)(2)
o Cash conversion at 123% of EBITDA (FY22: 122%).
o Adjusted net cash(2) at 31 December 2023 of £109.1m (FY22: £100.1m).
· The Board is recommending a final dividend of 9.30p, bringing the
full year dividend for 2023 to 13.00p (FY22: 10.50p) reflecting continued
strong cash performance and the Board's confidence in the Group's prospects.
· The Board has executed a number of buyback programmes of
on-market share purchases.
o £33m of share buybacks were completed in FY23; 12.2m Ordinary shares
representing c11.0% of the Group's issued share capital at the start of FY23
were bought and cancelled.
o A third buyback programme totaling up to £20m is on-going.
· Mears has made a strong start to 2024. The Board continues to
anticipate a reduction in management-led revenues as the elevated activity
level seen across FY23 normalises, although the timing remains uncertain.
Adjusted profit before tax in FY24 is expected to be of a similar quantum to
FY23.
Strategic Highlights
· The Group secured aggregate new contract awards of around £175m
during FY23, at a bid conversion rate of over 70% (by value), reflecting an
increasingly focused approach when bidding for new contract opportunities.
· The Social Housing Decarbonisation Fund ('SHDF') Wave 2 saw Mears
submit successful grant applications of c.£40m on behalf of clients. This
will contribute a total works value of around £120m to be delivered over the
course of 2024 and 2025.
· The Group remains well-placed in bidding a new contract with
North Lanarkshire Council ('NLC') to provide reactive maintenance, compliance,
servicing, and planned works. The contract would commence in July 2024 for a
period of up to 12 years, with an annual value in the region of £125m and a
total contract sum of over £1.5 billion, doubling the existing work with this
key client.
· The Group was proud of the positive feedback received through the
Sunday Times Best Big Companies to Work For survey reflecting Mears'
commitment to improving conditions and career development for employees.
Lucas Critchley, Chief Executive Officer of the Group, commented:
"We are delighted to have delivered strong growth in revenues, profits and
cash generation in 2023. The Group is recognised as a leading housing
specialist, and we continually look to evolve our capabilities to further
strengthen our market position. The Board believe that the Group is
well-positioned for the future and is pleased that the strong trading momentum
built in 2023 has continued into 2024."
1. The adjusted diluted EPS measure is adjusted to reflect a full tax charge
at 23.5% (FY22: 19.0%).
2. Adjusted net cash excludes IFRS 16 lease obligations of £254.4m (2022:
£225.4m) and includes treasury deposits of £7.1m (FY22: £2.0m).
3. Adjusted operating margin is stated before the impact of IFRS 16, as
detailed in the Finance Review.
For further information, contact:
Mears Group PLC Tel: +44(0)1452 634 600
Andrew Smith
Lucas Critchley
Deutsche Numis Tel: +44(0)207 260 1000
Julian Cater
Kevin Cruickshank
Panmure Gordon Tel: +44(0)207 886 2500
Tom Scrivens
James Sinclair-Ford
About Mears
Mears is a leading provider of services to the Housing sector, providing a
range of services to individuals within their homes. We manage and maintain
around 450,000 homes across the UK and work predominantly with Central
Government and Local Government, typically through long-term contracts. We
equally consider the residents of the homes that we manage and maintain to be
our customers, and we take pride in the high levels of customer satisfaction
that we achieve.
Mears currently employs over 5,000 people and provides services in every
region of the UK. In partnership with our Housing clients, we provide property
management and maintenance services. Mears has extended its activities to
provide broader housing solutions to solve the challenge posed by the lack of
affordable housing and to provide accommodation and support for the most
vulnerable.
We focus on long-term outcomes for people rather than short-term solutions and
invest in innovations that have a positive impact on people's quality of life
and on their communities' social, economic, and environmental wellbeing. Our
innovative approaches and market leading positions are intended to create
value for our customers and the people they serve while also driving
sustainable financial returns for our providers of capital, especially our
shareholders.
CHAIRMAN'S STATEMENT
Introduction
I am delighted to present my first statement as Chairman, and it is pleasing
to be able to report a year of excellent progress against our strategic
objectives. The continued strong trading performance is evidence that the
strategic actions of recent years, the investment in our operating platforms,
and our market leadership are delivering positively and position the Group
well for the future.
Results
Revenue has reached £1,089m, an increase of 14% over 2022. Profit before tax
was £46.9m, an increase of 34% over that achieved in 2022. Adjusted diluted
earnings per share rose by 27% to 31.24p. It is an important milestone for the
Group to see earnings per share move back above 30p, and this has been an key
factor in delivering the strong returns to shareholders in the last 12-months.
It is reassuring that cash generation was once again very strong. The adjusted
year-end net cash balance reached £109.1m and average net cash throughout the
year was £76.5m. This is the result of a fourth consecutive year of over 100%
conversion of profits to cash, while growing the business: a tremendous
achievement by the management team and staff across the Group. It reflects the
quality of the business and its underlying earnings.
During the period, the Group mobilised new works under our Rented Living
Accommodation Project ('RLAP') for the Ministry of Defence, providing housing
and support to those travelling to the UK under the Afghan Relocation and
Assistance Policy. This is further evidence of Central Government increasingly
looking to Mears to provide specialist housing support.
Our people
Mears has invested in its workforce over many years, and I was delighted to
see that the Group was listed in the top 10 of the Sunday Times Best Big
Companies to Work For. The commitment to our workforce starts at Board level,
evidenced by the appointment several years ago of an Employee Director who
works closely with a Deputy Employee Director and Trade Representative to
ensure that our people are at the forefront of our decision making and that
the Board has a good understanding of our employees' views. It is pleasing to
see that this is also reflected in a further reduction in staff turnover.
It was immensely satisfying to see a successful conclusion to the Group's 2020
Sharesave scheme which reached maturity in December 2023. The scheme, with an
exercise price of 93p, was granted at the end of a year that had been greatly
impacted by the Covid-19 pandemic and a period in which the Group was even
more dependent upon the hard work and commitment of our colleagues. The grant
at that time gave the Board the opportunity to show its gratitude for the
commitment shown through that period. The recent maturity saw over £7m of
value shared across 500 of our colleagues which was a tremendous outcome.
Dividend and capital allocation
Given the excellent trading performance of the Group, the continued strong
cash performance and the positive outlook, the Board is pleased to propose a
final dividend of 9.30p per share, bringing the total for the year to 13.00p,
an increase of 24% on 2022 and an increase of over 60% against 2021. Our
policy remains to progressively grow the dividend, keeping cover at between 2
- 2.5 times adjusted earnings.
The Group's capital allocation policy has been consistently communicated and
remains robust. The Board currently seeks to maintain an appropriate net cash
position. The Board continues to keep under review its capital allocation
priorities, which extends to small-scale M&A opportunities that could
enhance its service capabilities.
During FY23, the Board approved a return of surplus capital of c.£33m to
shareholders, that was implemented through a buyback programme of on-market
purchases. The 2023 buyback, which was delivered over two programmes during an
eight-month period, saw the purchase and cancellation of 12.2m ordinary shares
of 1p each at an average price of 272.7p, representing c.11.0% of the Group's
issued share capital at the start of the year. The strong momentum reported
in FY23 has continued into FY24 and, following the receipt of authority from
shareholders at a General Meeting held in February 2024, the Board announced
its intention to purchase up to a further £20m of shares, and this third
buyback programme is on-going.
As reported previously, the Group has utilised its balance sheet strength to
fund property acquisitions to support the urgent requirement for additional
properties within the Asylum Accommodation and Support Contract ('AASC'). At
the end of 2023, the Group had invested £22m in this area. Whilst it is not
the Group's long-term strategy to carry property assets on the Group's balance
sheet, this has been an important step in meeting the requirement for
additional capacity, to fulfil our client's needs.
ESG
I thank the ESG Board for its diligent work over the year. Mears takes good
governance seriously. Alongside our resident led Your Voice Scrutiny Board,
the ESG Board adds an extra layer of professional advice and assurance. The
Board's guidance is imperative, ensuring that we are driving forward on both
our legal and ethical obligations to reach our Net Zero targets.
Board developments and succession planning
During 2023, Kieran Murphy and Chris Loughlin stepped down from the Board.
Kieran reshaped the Mears' Board during his time as Chairman and provided wise
counsel and stewardship through a period impacted by the pandemic. Chris
brought considerable commercial and operational input to the Board. On behalf
of the Board, I would like to take the opportunity to thank Kieran and Chris
for their service to Mears and wish them both well for the future.
In December 2023, the Board welcomed the arrival of Nick Wharton as a
Non-Executive Director and Chair of the Audit and Risk Committee. Nick is a
Chartered Accountant with extensive finance and corporate governance
experience gained both in the UK and internationally, through executive and
non-executive positions under both public and private equity ownership, and
further improves the balance of skills and capabilities held by the Board.
During 2023, the Group's Employee Director, Hema Nar, elected for her position
to become a non-statutory appointment. This will enable Hema to solely focus
on being an effective link between the Board and the workforce. During 2023,
the Group has greatly enhanced this function, with the addition of both a
Deputy Employee Director and a Trade Representative. These three individuals
perform regular branch visits, are highly visible and are in frequent contact
with the Executive team. This has become an increasingly valuable channel of
communication. Hema will continue to attend and present at every Board
meeting. The change to a non-statutory position will not dilute the importance
or significance of the role.
Succession planning has been a key area of focus for the Board in recent
years. The transition of the CEO role from David Miles to Lucas Critchley has
been well-communicated and this changeover has gone smoothly. The Board
recognises the pivotal role that David played in driving the culture of the
business and Mears' brand. The transition of the CEO duties to Lucas is now
complete, and David stepped off the PLC Board at the end of 2023. David
remains a key member of the senior management team and has committed to
continue to provide support to the business with particular focus on client
engagement, customer service and driving commercial performance at a local
branch level over the medium-term.
Although the current Board is smaller in terms of headcount, I believe there
is a strong cultural alignment with the business and the Board has the
requisite skills and experience to operate effectively in the coming years.
The Board and Nominations Committee will continue to focus on succession
planning across the senior executive team. I am continually impressed by the
quality and strength of our senior management team operating across the
business in support of the Executive. The Group has a strong track-record of
developing talent internally, evidenced by both Lucas and Andrew Smith (CFO)
having developed within the business prior to their Board appointments. I can
already see a number of the senior team who will, in time, have the
opportunity to develop further as leaders of the business over the long-term.
Looking forward
The Board is delighted with the strong trading performance reported in FY23,
and this momentum has continued into FY24. We anticipate another strong
trading result in FY24 and communicated a significant upgrade to market
expectations in January 2024.
The Group is well positioned for the longer term, but management remains
conservative when providing guidance for later years. The Board has
consistently referred to elevated revenues within its management-led
activities and it is expected that this position will normalise, although the
timing is unclear. The Board is increasingly confident that the Group is well
positioned to deliver further improvements in operating margins, which it
expects will contribute to mitigating the profit impact from this reduction in
revenues.
The Group is delivering well against the strategic goals set within the
extensive business planning process concluded in 2021. The Board is now
challenging the Executive team to carry out a further detailed refresh. The
housing market continues to present significant opportunities for Mears. The
Board is also challenging the Executive team to consider opportunities within
adjacent markets and continue to identify emerging opportunities created
through innovation and changes in technology. The strength of the Group's
balance sheet and net cash position provides the opportunity to pursue a
number of options to deliver shareholder value.
CHIEF EXECUTIVE'S REVIEW
Introduction
It is pleasing to report another strong trading performance in FY23. The Group
has benefitted from the strategic redirection of the business over the last
five years, having exited from a number of non-core activities and applying a
rigorous approach to improving operating margins. The Group is recognised as a
leading housing specialist to the public sector. There is an increasing
reliance upon Mears by our Local and Central Government clients and Housing
Associations for the Group's expertise and problem-solving capabilities. We
will continually look to evolve our capabilities in this area to further
strengthen our market position and believe that the Group is well placed to do
so.
Operational Review
2023 2022 Change
£m £m
Revenue
Maintenance-led 543.3 535.3 +1%
Management-led 543.3 405.8 +34%
Development 2.7 18.5
Total 1,089.3 959.6 +14%
Operating profit before tax measures:
Statutory operating profit(1) 52.2 41.3 +26%
Adjusted operating profit (pre-IFRS 16)(2) 51.4 35.9 +43%
Adjusted operating margin (pre-IFRS 16) 4.7% 3.7%
Profit before tax measure
Statutory profit before tax 46.9 34.9 +34%
1. Operating profit includes share of profit in associates.
2. Adjusted measures are defined in the Alternative Performance Measures
section of the Finance Review.
Revenues increased by 14% to £1.09bn. Our maintenance-led activities reported
an increase of 1% to £543.3m which was impacted by the full-year effect of a
number of contract losses in 2022, which were reported previously. It is
reassuring that the Group has absorbed these losses and still delivered
revenue growth. The Executive team believes that, following a number of years
which have seen a reduction in maintenance-led revenues, this has plateaued.
Moving forward, the Executive team believes that the current market dynamics
and our continually developing offering to clients can deliver modest growth
in the traditional maintenance-led activities, supported by additional
spending in respect of decarbonisation.
Management-led activities have reported strong growth, with revenues growing
by 34% to £543.3m. It is a tremendous achievement that an area of the
business which the Group entered less than 10-years ago, and has been grown
almost entirely organically, now comprises half the Group's revenues. As
reported previously, the Group has experienced elevated revenues within the
Group's asylum services with volumes being significantly higher than
originally envisaged. The Executive team anticipates these revenues will
normalise, although the timing is uncertain. It is positive that the Group has
seen increased activity in both the Ministry of Defence and Ministry of
Justice contracts ('RLAP' and 'CAS3' respectively), and the Group sees further
opportunities to provide additional services to both of these important
clients.
It is particularly important that the business has continued to report strong
progress in adjusted operating margin, with the headline measure increasing to
4.7% (2022: 3.8%). Notwithstanding the Group's strategic ambitions to deliver
revenue growth, the primary focus of the senior team over recent years has
been to see the operating margin return towards its historical level of 5.0%.
As previously reported, the actions taken to exit non-core activities, prune
the contract estate to remove suboptimal arrangements, drive efficiencies at a
contract level, and maintain a disciplined approach to securing new works, all
continue to drive improvement to the operating margin.
One area of the business where trading has been unacceptable, is in respect of
the Community Housing business. This is only a small part of the Group's
operations, reporting revenues of c.£35m in 2023, in which the challenging
regulatory and operational environment has resulted in an operating loss in
the period. The Executive team will continue to focus on improving trading in
this area. Some of the contractual obligations in this part of the Group mean
it will not be a quick fix. The result for the period includes an impairment
to right of use assets of £6.2m and onerous contract provisioning of £4.2m
relating to these Community Housing activities. This is detailed within the
notes to the preliminary results.
The Executive team is mindful that the elevated revenues within the
management-led activities have delivered additional economies of scale and an
increased overhead recovery, which is a further factor behind an increasing
operating margin. However, the Executive team is confident that, as the
management-led revenues normalise, and some of this increased overhead
recovery diminishes, that this will be mitigated by efficiency improvements
within the business which will continue to drive improvement to margin.
Business development
We have seen a shift among some client organisations towards large, long-term
relationships that are broad in scope. We believe that these types of
opportunities play to Mears' strengths and present future opportunities.
Clients are increasingly seeking the competence and confidence from dealing
with a market leader, while the regulatory environment, and the detailed
compliance process around elements of work such as decarbonisation, serve to
further reduce the pool of serious competitors. This makes the comprehensive
Mears offer attractive to clients that are looking to package contracts in
this way.
Mears has successfully provided housing maintenance works to NLC since 2012,
with an annual value of c. £60m, delivering high service levels together with
excellent engagement with all stakeholders. Accordingly, the Group remains
well-placed in the tender by North Lanarkshire Council ('NLC') of the Housing
and Corporate Maintenance and Investment Services Contract, a bidding process
that commenced in 2022. The new contract would see Mears providing reactive
maintenance, statutory compliance, servicing, and inspection services, as well
as programmes of planned works to the Council's housing assets (approximately
37,000 homes) and corporate assets (approximately 1,200 buildings). The
contract is for a period of up to 12 years, with an annual value in the region
of £125m and a total contract sum of over £1.5bn.
With the exception of the NLC tender, the last 12-months has been a relatively
quiet period of new contract bidding. Positively, the Group secured both of
its key bidding targets contributing to an aggregate new contract awards of
around £175m, at a bid conversion rate of over 70% (by value). This reflects
an increasingly focused approach when bidding for new contract opportunities.
The Executive team anticipates that the total value of bids submitted in the
future will be lower than historical levels, but the proportion of successful
outcomes is anticipated to be higher. Importantly, both the contracts secured
in FY23 represent new work to the Group:
Ø London Borough of Croydon ('Croydon') has awarded to Mears a 10-year
contract with an estimated annual value of £6m. The contract is to deliver
responsive repairs, voids refurbishments, and planned maintenance works. Mears
was selected as one of two providers, and the Group is delighted to be working
in the Borough again, after a period of absence. The new contract commenced on
1 August 2023.
Ø A2Dominion ('A2D'): the Group has been awarded a contract with an estimated
annual value of c.£10m for a base period of 10 years with the potential for
this to be extended up to a total of 26 years. This contract award builds upon
an existing long-term relationship with A2D for repairs and maintenance
services to the housing stock outside of London, meaning that the Group will
now be delivering services across A2D's entire 38,000-unit portfolio. The new
contract commenced in October 2023. The contract will deliver services through
a pre-existing joint venture with A2D, in which the Group holds a 30%
interest. Therefore, whilst the A2D relationship is very significant for the
Group, the revenue is not included within the Group's consolidated revenue.
The profit contribution is introduced as a share of profit in an associate,
the Group's margin expectation against the notional revenue, is consistent
with other housing contracts.
FY24 is again expected to be a period of focused bidding activity with the
Group targeting a small number of new bidding opportunities where the mix of
quality, price, size, longevity, supply chain and cultural fit meets the
Group's bidding criteria. This highly qualified pipeline contains some
exciting opportunities. The Executive team is mindful that FY25 is likely to
be a busy period of rebidding, as a number of existing contracts are
approaching expiry and contractual extensions have been previously utilised. A
total annual contract value of c.£100m is expected to be re-bid during that
calendar year. Whilst the Group has an excellent record of retentions, rebids
naturally bring some risk and can distract from bidding for incremental
revenue opportunities with new and existing clients.
Decarbonisation
Over recent years, Mears has created an end-to-end decarbonisation service
through investment in expertise and technology to support our clients with the
huge challenge of improving social housing stock. In 2023, Central Government
committed £3.8bn of Social Housing Decarbonisation Funding (SHDF) to be
allocated in England and Wales over a 10-year period. The Group secured three
successful bids in respect of the first wave of SHDF applications, securing
grant funding on behalf of clients of £5m which doubled-up when combined with
client funding. The bulk of this value was delivered by the end of FY23. The
SHDF Wave 2 saw Mears submit successful grant applications of c.£40m, which
will contribute to a total works value of around £120m to be delivered over
the course of 2024 and 2025. It is the grant funded element that represents
new value to the Group's order book. There will be additional opportunities
for the Group in the interim Wave 2.2, and Waves 3 and 4 of the SHDF funding
applications.
Our market environment
The housing market continues to present opportunity for Mears to support
clients both in its traditional areas and some emerging new ones.
The demand for social housing, temporary accommodation and care provision
continued through 2023 and provided a solid market for innovation, partnership
working and outsourced services and capabilities.
The changes going through the sector are arguably as great as at any point in
recent history and follow a period of significant macro-economic challenges.
Our optimism about the future growth is based on the developments we see in
our markets, which are summarised below.
Political and regulatory · The Social Housing (Regulation) Act 2023 received Royal Assent.
New consumer standards and a new regulatory regime will come into force.
· £3.8bn has been allocated to the Social Housing Decarbonisation
fund with similar schemes in devolved nations. Data on the energy efficiency
of housing in England and Wales shows that most of the Local Authorities have
less than half of their dwellings achieving EPC band C or higher. The
Government is targeting social homes to reach band C by 2035
· The Decent Homes and Minimum Energy Efficiency standards (MEES)
are under review. Both are expected to set higher standards for the sector and
a transition period will be agreed for this improvement.
· The Regulator's review of damp and mould has demanded better
information on stock condition and faster resolution of the issue.
· The Procurement Act 2023 will bring with it an enhanced focus on
social value within the supply chain.
· The Building Safety Act 2022 has raised standards, in particular
within high rise buildings, especially in relation to fire safety.
· The compliance environment is tightening further, creating
opportunities.
Economic · The period of high interest rates has challenged a number of
social housing providers, with high debt burdens.
· The 7% rent increase cap imposed in 2023/24 put pressure on
providers but this cap has been removed in 2024/25, which should provide
financial improvement to the sector.
· The cost-of-living crisis has affected customers and colleagues.
Skills · UK-wide skills shortage in trade related roles, particularly
those with the right skills to undertake new Net Zero works. This requires a
long-term commitment to workforce development to resolve.
Technology · Data and cyber security issues have increased in the sector with
several landlords reporting issues. The Transparency, Influence and
Accountability Standards in relation to the diverse needs of tenants, come
into force in 2024.
· There is increased use of data, analytics, automation, and AI in
the housing sector. Many tenants are feeling "left behind" by some of these
developments.
Customer expectations · The newly regulated consumer standards in 2024, will further
raise expectations and require high quality service solutions and data
management.
Our Pathway to Net Zero
We have launched Our Pathway to Net Zero
(https://www.mearsgroup.co.uk/healthy-planet/mears-net-zero-strategy) and made
this available via our website. We have recruited a Net Zero Manager to
co-ordinate our pathway going forward.
The primary focus for 2023 was the development of detailed plans to transition
our fleet of company vehicles to electric alternatives by 2030 - this is
important to the success of our strategy as 96% (2021 baseline) of our Scope 1
emissions (and 91% when combining Scope 1 and 2) are from our vehicle fleet.
Mears has completed a comprehensive fleet infrastructure and transition
planning project to gain a deeper understanding of the detailed steps we need
to undertake to transition 85% our fleet to zero carbon alternatives by 2030.
We have created a clear transition plan to decarbonise our fleet within the
trajectory set out within Our Pathway to Net Zero for implementation from 2024
onwards.
Workforce
We are proud of our achievement of being in the top 10 of the Sunday Times
Best Big Companies to Work For survey. This reflects years of commitment to
improving conditions and career development for our staff. We see the benefits
in low staff turnover, low vacancies, and the ability to grow the skills of
our people, to meet the need of changing client requirements. We also
recognise the strong correlation between staff satisfaction, customer
satisfaction and financial performance.
We value the fact that we have an Employee Director, a Deputy Employee
Director focused on supporting people with disabilities, a Trade
Representative and a Group wide employee forum. They enable the Board to stay
close to our front-line staff and to ensure that decisions are made with the
impact on the workforce fully understood.
Customer and client engagement
We monitor our success with customers and clients through a number of measures
including the ability to win and retain work, as well as directly measuring
the satisfaction of clients and tenants/ service users.
We maintain an independently chaired Customer Scrutiny Board, which produces a
report on its findings which is published openly. All our key service changes
are reviewed and optimised as well as investigating areas that require
improvement.
Our main areas of focus in 2023 were around enhancing the ways that customers
could interact with us digitally. While we recognise that this is important to
many people, we have not lost sight of the need to maintain the more personal
ways of contact that many of our customers still prefer.
FINANCE REVIEW
This section provides further key information in respect of the financial
performance and financial position of the Group to the extent not already
covered in detail within the Chief Executive Officer's Review.
ALTERNATIVE PERFORMANCE MEASURES (APMs)
The Strategic Report includes both statutory and adjusted performance
measures. APMs are considered useful to stakeholders in assessing the
underlying performance of the business, adjusting for items which could
distort the understanding of performance in the year and between periods, and
when comparing the financial outputs to those of our peers. The APMs have been
set considering the requirements and views of the Group's investors and
debt funders among other stakeholders. The APMs and KPIs are aligned to the
Group's strategy and form the basis of the performance measures for
remuneration.
These APMs should not be considered as a substitute for or superior to
International Financial Reporting Standards (IFRS) measures, and the Board has
endeavoured to report both statutory and alternative measures with equal
prominence throughout the Strategic Report and preliminary results.
The APMs used by the Group are detailed below with an explanation as to why
management considers the APM to be useful in helping users to have a better
understanding as to the Group's underlying performance. A reconciliation is
also provided to map each non-IFRS measure to its IFRS equivalent.
A reconciliation between the statutory profit measures and the alternative
adjusted measures for both 2023 and 2022 is detailed below.
Note 2023 2022
£'000
£'000
Profit before tax Statutory 46,918 34,944
IFRS 16 profit impact See below 9,093 2,201
Finance income (non-IFRS 16) Note 5 (4,655) (1,268)
Operating profit pre-IFRS 16(1) APM 51,356 35,877
Amortisation of software and acquisition intangibles Note 13 1,879 2,300
Depreciation and loss on disposal (non-IFRS 16)(3) Note 14 7,385 8,023
EBITDA pre-IFRS 16(1) APM 60,620 46,200
IFRS 16 profit impact See below (9,093) (2,201)
Finance costs (IFRS 16) Note 5 9,898 7,610
Depreciation, loss on disposal and impairment (IFRS 16)(2) Note 15 56,951 43,259
EBITDA post-IFRS 16(1) APM 118,375 94,868
Amortisation of software and acquisition intangibles Note 13 (1,879) (2,300)
Depreciation, loss on disposal and impairment (IFRS 16)(2) Note 15 (56,951) (43,259)
Depreciation and loss on disposal (non-IFRS 16)(3) Note 14 (7,385) (8,023)
Operating profit post-IFRS 16(1) APM 52,161 41,286
1 Operating profit and EBITDA measures include share of profits of
associates.
2 Includes profit on disposal of £180,000 (2022: £228,000) and
impairment of £6,223,000 (2022: £nil)
3 Includes loss on disposal of £80,000 (2022: £2,000).
Note 2023 2022
£'000
£'000
Revenue Statutory 1,089,327 959,613
Adjusted operating profit pre-IFRS 16 APM 51,356 35,877
Adjusted operating margin % APM 4.7% 3.7%
The Group's adjusted PBT measure has historically been reported before charges
for the amortisation of acquisition intangibles. The Directors consistently
explained their rationale for adjusting for this charge, which is a treatment
understood and supported by the Group's investors. This charge has
historically been significant; for instance, in 2021 it was £7.7m. However,
in the absence of significant recent acquisitions, the amortisation charge has
reduced to £0.2m per annum and, at this level, is considered de minimis. As
indicated in the previous year, this adjustment has not been applied in 2023
and the comparative measure for 2022 has been adjusted.
The Group provides an APM which reports results before the impact of lease
accounting under IFRS 16. The Directors use the pre-IFRS 16 measure to
generate the Group's headline operating margin; whilst this generates a lower
operating margin, it reflects how the underlying contracts have been
tendered and is also more aligned to cash generation. Management has also
provided this alternative measure at the request of several shareholders and
market analysts to allow those stakeholders to properly assess the results of
the Group over time. In addition, this is the measure used for the purposes of
assessing the Group's compliance with its banking covenants.
EARNINGS PER SHARE (EPS)
The alternative earnings measure is adjusted to reflect a full corporation
tax charge of 23.5% (2022: 19.0%), which will increase to 25.0% in 2024. The
Directors believe this aids consistency when comparing to historical results
and provides less incentive for the Group to participate in artificial
schemes where the primary intention is to reduce the tax charge. A
reconciliation between the statutory measure for profit for the year
attributable to shareholders before and after adjustments for both basic and
diluted EPS is:
Diluted (continuing) Diluted (discontinued) Diluted (continuing and discontinued)
2023 2022 2023 2022 2023 2022
p
p
p
p
p
p
Earnings per share 31.94 24.51 0.00 0.44 31.94 24.95
Effect of full tax charge adjustment (0.70) (0.22) - (0.05) (0.70) (0.26)
Normalised earnings per share 31.24 24.29 - 0.39 31.24 24.68
Continuing Discontinued Continuing and discontinued
2023 2022 2023 2022 2023 2022
£'000
£'000
£'000
£'000
£'000
£'000
Profit attributable to shareholders 35,204 27,813 - 494 35,204 28,307
Full tax adjustment (768) (245) - (55) (768) (300)
Normalised earnings 34,436 27,568 - 439 34,436 28,007
NET CASH/(DEBT)
The Group excludes the financial impact of IFRS 16 from its adjusted net
cash/(debt) measure. This adjusted net cash/(debt) measure has been introduced
to align the net borrowing definition to the Group's banking covenants, which
are required to be stated before the impact of IFRS 16.
The Group does not recognise lease obligations as traditional debt instruments
given a significant proportion of these leases have break provisions which
allow the Group to cancel the associated lease obligation with minimal
associated cost. A reconciliation between the reported net cash/(debt) and the
adjusted measure is detailed below:
Note 2023 2022
£'000
£'000
Cash and cash equivalents 138,756 98,138
Short-term financial assets 7,090 1,963
Overdrafts and other credit facilities (36,699) -
Adjusted net cash APM 109,147 100,101
Lease liabilities (current) Note 20 (54,492) (44,376)
Lease liabilities (non-current) Note 20 (199,948) (181,045)
Net debt (including IFRS 16 lease obligations) Statutory (145,293) (125,320)
IFRS 16 - LEASE ACCOUNTING
The profit impact in respect of IFRS 16, which was included within the APM
analysis above, is detailed below:
2023 2022
£'000
£'000
Charge to income statement on a post-IFRS 16 basis (60,626) (50,869)
Charge to income statement on a pre-IFRS 16 basis (57,756) (48,668)
Profit impact from the adoption of IFRS 16 and before impairment (2,870) (2,201)
Impairment of right of use assets (6,223) -
Profit impact from the adoption of IFRS 16 (9,093) (2,201)
Leasing properties has become an integral part of the Group's service
offering. The Group delivers a number of contracts to Central Government which
include the provision of over 10,000 individual residential properties as part
of a wider service offering. In addition, the Group provides over 2,000
property units for rental as part of the Group's Community Housing activities
to address Local Authority demand for temporary housing. The associated
customer contracts are typically long-term, and the underlying commercial
pricing mechanism applies a margin to the annual lease payment. Revenue is
broadly consistent over time, increasing by an annual indexation adjustment
with the associated lease payments following a similar mechanism.
Accounting standards require that, where a contract is identified as a lease
under the rules of IFRS 16, the Group recognises its right to use a leased
asset and a lease liability representing its obligation to make lease
payments. The depreciation cost of the lease asset is typically charged to
profit within cost of sales, whilst the interest cost of the newly recognised
lease liability is charged to finance costs. On the basis that depreciation is
required to be charged on a straight-line basis, whilst the interest element
is charged on an amortised cost basis, this results in a higher charge being
applied to the income statement in the early years of a lease, with this
impact reversing over the later years. Ultimately, IFRS 16 has no impact on
the lifetime profitability of the contracts and there are no cash flow
impacts, but the standard alters the phasing over time, front-loading the
cost.
Where leasing arrangements are over the long-term, the differential in the
charge applied to the income statement under IFRS 16 compared to the lease
payment can be significant, whilst the revenue recognition associated with
these leases remains at a consistent level, aligned to the respective lease
payment. It is for this reason that the Group has consistently utilised an APM
to report profits on a pre-IFRS 16 basis. In doing so, the mismatch between
the recognition of revenue and the associated cost is addressed.
IFRS 16 and IAS 36; depreciation and impairment of right of use asset
Under IAS 36, the Directors are required to carry out an impairment review at
31 December 2023, for each asset or group of assets with separately
identifiable cash inflows, if there is considered to be an indication of
impairment. The Directors recognise that for each Community Housing scheme,
the relevant group of right of use assets has identifiable cash inflows and
therefore the Directors are required to assess whether there are any
indicators of impairment for each of these housing schemes. Notably, the
Directors recognise that:
· Property yields have increased during FY23. This measure is
closely correlated to discount rates, and an increasing discount rate will
result in a reduction in the Value in Use.
· The Directors also note that property maintenance costs have
increased during FY23, impacted by increasing regulation attached to
affordable housing. An increase in the costs attached to property leasing, to
the extent that it cannot be passed onto the customer or recovered through
other mechanisms mentioned above, will reduce the Value in Use. Property costs
are not expected to reduce, and the Directors recognise that an ageing asset
may incur further cost over time.
· Largely as a result of the above, a number of the Community
Housing schemes have delivered shortfalls against previous forecasts.
IFRS 16 carrying values
The Directors identified indicators of impairment on a number of Community
Housing scheme assets and the future cash flows were modelled on those assets
in order to derive a measurement for the Value in Use which was compared to
the carrying value of the respective assets; the significant majority of the
carrying value relates to right of use assets and, to a much lesser extent,
some leasehold improvements in tangible assets. In aggregate, an impairment
charge of £6.2m was applied in the year. The additional charge applied to
FY23 will be mirrored by a reduction in depreciation in future periods and
ultimately has no impact on the lifetime profitability of any of the
underlying contracts.
The table below highlights the acceleration of the recognition of cost through
the adoption of IFRS 16; the right of use asset is being charged on a
straight-line basis whilst the interest element is charged on the remaining
balance outstanding. This position would be expected to reverse over the
remaining lease terms, resulting in a reduced charge to the income statement:
Note 2023 2022
£'000
£'000
Lease obligations at 31 December 20 254,440 225,421
Right of use asset at 31 December 15 233,649 213,432
Future lifetime profit impact as at the balance sheet date, from the adoption 20,791 11,989
of IFRS 16 compared to the future lease payment
TAXATION
Mears does not engage in artificial tax planning arrangements but takes
advantage of available tax reliefs. The tax position in any transaction is
aligned with the commercial reality and any tax planning is consistent with
the spirit as well as the letter of tax law. Mears has a low appetite for risk
and, when making decisions regarding tax, reputational and commercial as well
as financial risks are considered. Given the Group's activities are largely
involved in servicing public sector clients, the risk of reputational damage
flowing from a tax compliance failure is higher than in other sectors. This
leads the Group to take a risk averse approach if there is an element of
uncertainty regarding a particular treatment.
The Group normalises its headline EPS measure to reflect a full tax charge. In
so doing, the Board has removed from its primary performance measure any
potentially positive impact that could be achieved through reducing the
Group's Corporation Tax charge.
Further detail in respect of the taxes paid during 2023 are detailed below:
Taxes borne Tax collected Total
£m
£m
£m
Corporation Tax 10.9 0.0 10.9
VAT and Insurance Premium Tax(1) 0.6 117.9 118.5
Construction Industry Scheme 0.0 6.2 6.2
Income taxes 0.9 26.6 27.5
National Insurance 17.8 11.8 29.6
Total 30.2 162.5 192.7
(1) VAT excludes the disallowance of input tax recovery on the Group's exempt supplies.
BALANCE SHEET
The Group reported a reduction in net assets from £213.8m to £200.6m. The
significant distribution to shareholders through both ordinary dividend and
share buybacks has reduced the net asset position in the year, but the strong
profit generation has ensured a robust position has been maintained. The key
movements are detailed below:
£m
Net assets at 1 January 2023 213.8
Profit after tax 36.7
Dividends (11.8)
Share buybacks including purchases by EBT (38.2)
Reduction in pension net surplus (4.4)
Other equity movements 4.5
Net assets at 31 December 2023 200.6
The key balance sheet categories are reported below together with a brief note
to provide further explanation:
Assets
2023 2022
£m £m
Goodwill 121.9 121.9
Intangible assets 7.0 7.5
Property, plant and equipment ('PPE') 38.5 20.2
Right of use assets 233.6 213.4
Investments and loan notes 5.1 5.3
Pension assets 19.8 26.8
Total non-current assets 426.0 395.1
Inventories 1.5 6.9
Trade receivables 126.7 128.3
Corporation tax asset - 0.5
Bank, cash and short-term financial assets 145.8 100.1
Total current assets 274.0 235.8
Total assets 700.0 630.8
· Goodwill was generated from previous acquisitions and is tested
annually for impairment.
· Intangible assets primarily relate to in-house developments to
the key operational IT platforms and are amortised over their useful economic
life of c.5 years.
· PPE additions are typically low given the Mears operating model
is not capital intensive. During FY23, the Group made property additions of
£22.1m to support the requirements of the AASC.
· As detailed above, leasing properties has become an integral part
of the Group's service offering. The Group recognises its right to use a
leased asset in accordance with IFRS 16.
· Loan notes of £4.5m were received on the disposal of Terraquest
in 2020 and include interest accruing annually at 10%.
· Investments relate primarily to our A2 Dominion partnership over
which the Group has significant influence but which it does not control.
· Pension accounting is covered in detail below.
· Working capital balances include trade receivables and
inventories; further explanation is provided below. The net cash balance is
also detailed below, combining the Bank, Cash and short-term financial assets
with the overdraft and other credit facilities.
Liabilities
2023 2022
£m £m
Overdraft and other credit facilities (36.7) -
Trade payables (187.0) (171.0)
Current lease liabilities (54.5) (44.4)
Provisions (8.4) (8.8)
Total current liabilities (286.6) (224.2)
Pension liabilities (0.2) (3.1)
Deferred tax liability (2.9) (4.9)
Non-current lease liabilities (199.9) (181.0)
Other non-current liabilities - (0.7)
Non-current provisions (9.8) (3.1)
Total non-current liabilities (212.8) (192.9)
Total liabilities (499.4) (417.0)
Total net assets 200.6 213.8
· As detailed above, leasing properties has become an integral part
of the Group's service offering. Where a contract is identified as a lease
under the rules of IFRS 16, the Group recognises a lease liability
representing its obligation to make lease payments. Liabilities falling due
within 12 months are categorised as current, with the remainder non-current.
· All Group profits are chargeable to corporation tax at the
headline rate of 23.5% (2022: 19.0%), which increases to 25% for 2024.. The
Group is required to make quarterly payments, meaning any creditor outstanding
at the period end is relatively low.
· A provision is a liability of uncertain timing or amount.
Provisions can be distinguished from other liabilities such as trade payables
and accruals because there is uncertainty about the timing or amount of the
future expenditure required in settlement. The opening provision of £8.8m
predominantly relates to a number of legal claims. The closing provision
predominantly relates to onerous contract provisioning where the Directors
have made an assessment as to the likely future loss. Additional detail is
provided within note 21 to the preliminary results.
· Non-current provision relates to insurance losses which the Group
chooses to self-insure.
· A deferred tax liability of £2.9m (2022: £4.9m) is recognised
on temporary differences between the treatment of items for tax and accounting
purposes.
DEFINED BENEFIT PENSION ARRANGEMENTS
The Group's defined benefit pension arrangement can be categorised three ways:
· Two principal Group pension schemes, where the Group is fully at
risk over the long term.
· Four schemes where the Group has received Admitted Body status in
a Local Government Pension Scheme ('LGPS'), but where the Group holds a
back-to-back indemnity under the associated customer contract, which removes
the Group's exposure to changes in pension contributions and any future
deficit risk.
· Nine other schemes, the majority of which are LGPS, but where
there is no indemnity in place. However, the risk attached to these schemes
matches the time horizon of the underlying contract; whilst not removing risk,
it reduces the period over which deficit can arise, and therefore the Group
is fully at risk over the medium-term.
The Directors are comfortable with the position on both the guaranteed and
other schemes. The Group enjoys a significant surplus on many of these
schemes, but these are not recognised as assets as there is uncertainty
around the ability to recover a surplus.
The two principal Group schemes enjoy a strong financial position and have
done consistently over the last 10 years. Both schemes are relatively mature,
and most assets held are matched to the underlying obligations. It was
pleasing to reach a position where both Group schemes can be considered
largely self-sufficient. The Directors are really pleased with the performance
of the scheme managers and trustees who have managed this pension risk so well
over many years to reach the position reported today.
The pension disclosure is split on the face of the balance sheet between
non-current assets and non-current liabilities. In addition, the pension
guarantee assets in respect of the four indemnified schemes are reported
separately from their associated liabilities.
2023 2023 2023 2023
Group
Guarantee
Other
Total
£'000
£'000
£'000
£'000
Total scheme assets 129,494 54,137 57,426 241,057
Total obligations (109,659) (40,890) (42,452) (193,001)
Funded status 19,835 13,247 14,974 48,056
Surpluses not recognised as assets - (13,247) (15,146) (28,393)
Pension surplus / (liability) 19,835 - (172) 19,663
CASH FLOW AND WORKING CAPITAL MANAGEMENT
The Group has delivered excellent operating cash flows over recent years with
strong underlying EBITDA to operating cash conversion. Mears fosters a strong
"cash culture", whereby the Group's front-line operations understand that
invoicing and cash collection are intrinsically linked, and that a works order
is not complete until the monies are banked. This culture has underpinned
strong cash performance over many years. The impact of the increase in
provisioning, which by its nature is a non-cash item in the period, has driven
a further increase in the reported cash conversion measure. However, without
this enhancement, the Group would still have delivered EBITDA to operating
cash of c.110%.
2023 2022
£'000
£'000
Profit before tax 46,918 34,944
Net finance costs 5,242 6,341
Depreciation and amortisation 9,264 10,323
Right of use asset depreciation and impairment 56,951 43,259
EBITDA 118,375 94,868
Other adjustments (204) 376
Change in inventories 5,416 15,991
Change in operating receivables 1,290 13,855
Change in operating payables and provisions 20,346 (9,760)
Operating cash flow 145,224 115,330
EBITDA to operating cash conversion 123% 122%
The Group reported an adjusted net cash position at the year-end of £109.1m
(2022: £100.1m). Whilst it is pleasing to report a strong cash position
within the year-end balance sheet, of much greater significance is the
performance over the 365-day period. Positively, the strong year-end
performance is also mirrored in the average daily adjusted net cash for the
year at £76.5m (2022: £42.9m). During FY23, the Group implemented a share
buyback programme of on-market purchases which resulted in the purchase and
cancellation of 12.2m ordinary shares of 1p each at an average price of
272.7p, a cash outflow of c.£33m. In addition, the Group acquired 1.7m shares
for a cash consideration of £4.7m on behalf of the Employee Benefit Trust.
The average daily net cash, adjusted for a full year impact of the share
buyback, was £50.3m, which the Board consider to be a better indication of
the opening liquidity position moving into FY24.
2023 2022
£'000
£'000
Average daily adjusted net cash 76,515 42,880
Adjusted net cash at 31 December 109,147 100,101
SHARE BUYBACKS
During FY23, the Board approved and completed a return of surplus capital of
c.£33m to shareholders, being implemented through a buyback programme of
on-market purchases. The buyback saw the purchase and cancellation of 12.2m
ordinary shares over an eight-month period, representing c11.0% of the Group's
issued share capital at the start of the year. Whilst the Board was pleased to
have delivered a significant buyback over a relatively short period, the
majority of purchases were during the second-half and, as such, much of the
EPS accretion will not be seen until FY24. This is shown in the table below:
Number
'000
Number of shares in issue at 1 January 2023 111,001
Part year impact of share buybacks and cancellations (3,922)
Part-year impact of option exercises 300
Weighted average number of shares in issue in FY23 for calculating earnings 107,379
per share in FY23
Full year impact of share movements in 2023 (5,828)
Number of shares in issue at 31 December 2023 which will form the basis for 101,551
calculating earnings per share in FY24
BANKING AND FINANCIAL COVENANTS
The Group has a simple approach to its debt funding arrangements, holding a
single revolving credit facility (RCF) which provides a total commitment of
£70m but allows the Group to draw down monies as required, mirroring an
overdraft facility. The Group also has an overdraft facility which is carved
out from this facility to provide additional flexibility. The Board is
grateful for the tremendous support that has been provided to the Group by its
banking partners over several decades.
The financial covenants included within the RCF, which are tested twice-yearly
on 30 June and 31 December, are detailed below. Given the Group traded on a
net cash basis throughout 2023, and enjoyed an associated finance credit,
there is significant headroom. Nevertheless, the Directors have completed a
Viability Review and stress tested the Group's resilience given several
downside scenarios.
Covenant Formulae Covenant ratio
Leverage Consolidated net borrowing divided by adjusted consolidated EBITDA* 3.00x
Interest cover Adjusted consolidated EBITDA* divided by consolidated net finance charges** 3.50x
* Adjusted EBITDA on a rolling 12-month basis, pre-IFRS 16, and stated
before non-underlying items and share-based payments.
** Net finance charges are stated on a pre-IFRS 16 basis and comprise
all commission, fees, and other finance charges payable in respect of
financial indebtedness. This excludes income/costs relating to
Group pension arrangements.
A margin ratchet ranging from 1.75-2.75% is applied to drawdowns under the
RCF, determined by the Group's leverage ratio at each quarter end. This margin
is payable in addition to the Sterling Overnight Index Average (SONIA). Given
the strong liquidity and cash performance, the Board's expectation would be
for the margin payable during 2024 to be at the bottom end of the range.
Consolidated statement of profit or loss
For the year ended 31 December 2023
Note 2023 2022
£'000 £'000
Continuing operations
Sales revenue 2 1,089,327 959,613
Cost of sales (870,557) (763,927)
Gross profit 218,770 195,686
Administrative expenses (167,096) (155,259)
Operating profit 4 51,674 40,427
Share of profits of associates 16 486 858
Finance income 5 5,939 2,033
Finance costs 5 (11,181) (8,374)
Profit for the year before tax 46,918 34,944
Tax expense 8 (10,258) (6,441)
Profit for the year from continuing operations 36,660 28,503
Discontinued operations
Profit from discontinued operations 9 - 542
Tax charge on discontinued operations 8 - (48)
Profit for the year after tax from discontinued operations - 494
Profit for the year from continuing and discontinued operations 36,660 28,997
Attributable to:
Owners of Mears Group PLC 35,204 28,307
Non-controlling interest 1,456 690
Profit for the year 36,660 28,997
Earnings per share - from continuing operations
Basic 11 32.90p 25.07p
Diluted 11 31.94p 24.51p
Earnings per share - from continuing and discontinued operations
Basic 11 32.90p 25.51p
Diluted 11 31.94p 24.94p
The accompanying accounting policies and notes form an integral part of these
preliminary results.
Consolidated statement of comprehensive income
For the year ended 31 December 2023
Note 2023 2022
£'000 £'000
Profit for the year 36,660 28,997
Other comprehensive income that will not be subsequently reclassified to the
Consolidated Statement of Profit or Loss:
Actuarial loss on defined benefit pension schemes 26 (5,521) (3,041)
Pension guarantee asset movements in respect of actuarial gain 26 (408) (6,754)
Deferred tax credit in respect of defined benefit pension schemes 23 1,482 2,449
Other comprehensive income for the year (4,447) (7,346)
Total comprehensive income for the year 32,213 21,651
Attributable to:
Owners of Mears Group PLC 30,757 20,961
Non-controlling interest 1,456 690
Total comprehensive income for the year 32,213 21,651
Total comprehensive income for the year attributable to owners of Mears Group
PLC arises from:
Continuing operations 30,757 20,467
Discontinued operations - 494
Total comprehensive income for the year attributable to owners of Mears Group 30,757 20,961
PLC
The accompanying accounting policies and notes form an integral part of these
preliminary results.
Consolidated balance sheet
As at 31 December 2023
Note 2023 2022
£'000 £'000
Assets
Non-current
Goodwill 12 121,868 121,868
Intangible assets 13 7,046 7,452
Property, plant and equipment 14 38,533 20,188
Right of use assets 15 233,649 213,432
Investments 16 622 1,271
Loan notes and other non-current receivables 22 4,458 4,073
Pension and other employee benefits 26 19,835 23,672
Pension guarantee assets 26 - 3,136
426,011 395,092
Current
Inventories 17 1,463 6,879
Trade and other receivables 18 126,690 128,334
Current tax assets - 459
Short-term financial assets 22 7,090 1,963
Cash and cash equivalents 22 138,756 98,138
273,999 235,773
Total assets 700,010 630,865
Equity
Equity attributable to the shareholders of Mears Group PLC
Called up share capital 24 1,016 1,110
Share premium account 24 2,332 82,351
Share-based payment reserve 1,883 1,801
Treasury shares 24 (5,122) -
Merger reserve 7,971 7,971
Retained earnings 189,428 119,100
Total equity attributable to the shareholders of Mears Group PLC 197,508 212,333
Non-controlling interest 2,948 1,492
Total equity 200,456 213,825
Liabilities
Non-current
Pension and other employee benefits 26 172 3,136
Deferred tax liabilities 23 2,905 4,898
Lease liabilities 20 199,948 181,045
Other non-current liabilities - 682
Non-current provisions 21 9,785 3,110
212,810 192,871
Current
Overdraft and other short-term borrowings 22 36,699 -
Trade and other payables 19 187,035 171,013
Lease liabilities 20 54,492 44,376
Provisions 21 8,406 8,780
Current tax liabilities 112 -
Current liabilities 286,744 224,169
Total liabilities 499,554 417,040
Total equity and liabilities 700,010 630,865
The preliminary results were approved and authorised for issue by the Board of
Directors and were signed on its behalf on 10 April 2024.
L J CRITCHLEY A C M SMITH
DIRECTOR DIRECTOR
Company number: 03232863
The accompanying accounting policies and notes form an integral part of these
preliminary results.
Consolidated cash flow statement
For the year ended 31 December 2023
Note 2023 2022
£'000 £'000
Operating activities
Result for the year before tax 46,918 34,944
Adjustments 25 71,253 60,524
Change in inventories 5,416 15,991
Change in trade and other receivables 1,290 13,855
Change in trade, other payables and provisions 20,346 (9,760)
Cash inflow from operating activities of continuing operations before taxation 145,223 115,554
Taxes paid (9,330) (4,128)
Net cash inflow from operating activities of continuing operations 135,893 111,426
Net cash outflow from operating activities of discontinued operations 9 - (494)
Net cash inflow from operating activities 135,893 110,932
Investing activities
Additions to property, plant and equipment (24,347) (8,052)
Additions to other intangible assets (1,499) (1,364)
Proceeds from disposals of property, plant and equipment 17 -
Expenditure on acquisition of subsidiary, net of cash acquired - (2,928)
Distributions from associates 16 1,135 300
Movement in short-term cash deposits held for investment purposes 22 (5,127) (1,963)
Interest received 4,167 764
Net cash outflow from investing activities of continuing operations (25,654) (13,243)
Net cash inflow from investing activities of discontinued operations 9 - 7,333
Net cash outflow from investing activities (25,654) (5,910)
Financing activities
Proceeds from share issue 2,557 87
Purchase of own shares (37,887) -
Net cash inflow from other credit facilities 25 11,244 -
Loans provided to other entities (non-controlled) - (225)
Repayment of loan acquired with subsidiary - (37)
Discharge of lease liabilities (48,149) (43,169)
Interest paid (11,081) (8,425)
Dividends paid - Mears Group shareholders 10 (11,760) (9,692)
Net cash outflow from financing activities of continuing operations (95,076) (61,461)
Net cash outflow from financing activities of discontinued operations 9 - (55)
Net cash outflow from financing activities (95,076) (61,516)
Cash and cash equivalents, beginning of year 25 98,138 54,632
Net increase in cash and cash equivalents 15,163 43,506
Cash and cash equivalents, end of year 25 113,301 98,138
Consolidated statement of changes in equity
For the year ended 31 December 2023
Attributable to equity shareholders of the Company Non- Total
controlling equity
interest £'000
£'000
Share Share Share- Treasury Merger Retained
capital premium based reserve reserve earnings
£'000 account payment £'000 £'000 £'000
£'000 reserve
£'000
At 1 January 2022 1,109 82,265 1,313 - 7,971 107,578 802 201,038
Net result for the year - - - - - 28,307 690 28,997
Other comprehensive income - - - - - (7,346) - (7,346)
Total comprehensive income for the year - - - - - 20,961 690 21,651
Tax charge on share-based payments - - - - - 142 - 142
Issue of shares 1 86 - - - - - 87
Share options - value of employee services - - 599 - - - - 599
Share options - exercised or lapsed - - (111) - - 111 - -
Dividends - - - - - (9,692) - (9,692)
At 1 January 2023 1,110 82,351 1,801 - 7,971 119,100 1,492 213,825
Net result for the year - - - - - 35,204 1,456 36,660
Other comprehensive income - - - - - (4,447) - (4,447)
Total comprehensive income for the year - - - - - 30,757 1,456 32,213
Tax credit on share-based payments - - - - - 867 - 867
Issue of shares 27 2,530 - - - - - 2,557
Purchase of treasury shares - - - (5,122) - - - (5,122)
Cancellation of shares (121) - - - - (33,043) - (33,164)
Capital reduction - (82,549) - - - 82,549 - -
Share options - value of employee services - - 1,040 - - - - 1,040
Share options - exercised or lapsed - - (958) - - 958 - -
Dividends - - - - - (11,760) - (11,760)
At 31 December 2023 1,016 2,332 1,883 (5,122) 7,971 189,428 2,948 200,456
The accompanying accounting policies and notes form an integral part of these
preliminary results.
Notes to the preliminary results - Group
For the year ended 31 December 2023
1. ACCOUNTING POLICIES
Accounting policies are detailed in their respective notes, where relevant.
Policies that are not specific to a particular note are detailed below.
Basis of preparation
The financial information in this announcement does not constitute the Group's
or the Company's statutory accounts as defined in section 434 of the Companies
Act 2006 for the years ended 31 December 2023 or 2022 but is derived from
those accounts. Statutory accounts for 2022 have been delivered to the
registrar of companies, and those for 2023 will be delivered in due course.
The auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006.
The preliminary results of the Group have been prepared in accordance with
United Kingdom adopted International Accounting Standards. The preliminary
results are prepared under the historical cost convention as modified by the
revaluation of contingent consideration and assets in the Group's defined
benefit pension schemes. They are presented in Sterling and all values are
rounded to the nearest thousand (£'000).
Mears Group PLC is the ultimate parent company of the Group. It is
incorporated and resident in England and Wales (registration number 03232863).
Its registered office and principal place of business is 1390 Montpellier
Court, Gloucester Business Park, Brockworth, Gloucester GL3 4AH. Mears Group
PLC's shares are listed on the Main Market of the London Stock Exchange.
Basis of consolidation
The Consolidated Balance Sheet includes the assets and liabilities of the
Company and its subsidiaries and is made up to 31 December 2023. Entities for
which the Group has the ability to exercise control over financial and
operating policies are accounted for as subsidiaries. Control is achieved
where the Company has existing rights that give it the current ability to
direct the activities that affect the Company's returns and exposure or rights
to variable returns from the entity. Interests acquired in entities are
consolidated from the effective date of acquisition and interests sold are
consolidated up to the date of disposal.
All significant intercompany transactions and balances between Group
enterprises, including unrealised profits arising from intra-group
transactions, are eliminated on consolidation; no profit is taken on sales
between Group companies.
Non-controlling interests in the net assets of consolidated subsidiaries are
identified separately from the Group's equity therein. Non-controlling
interests consist of the amount of those interests at the date of the original
business combination and the non-controlling shareholders' share of changes in
equity since the date of the combination.
A joint venture is a joint arrangement whereby the parties that have joint
control have the rights to the net assets of the arrangement. Associates are
entities over which the Group does not have control, but has significant
influence. Investments in joint ventures and associates are accounted for
using the equity method of accounting. Under this method, the Group's share of
post-acquisition profits or losses is recognised in the Consolidated
Statement of Profit or Loss; the cost of the investment in a given joint
venture or associate, together with the Group's share of that entity's
post-acquisition changes to shareholders' funds, is included in investments
within the Consolidated Balance Sheet.
Going concern
The Directors do not consider going concern to be a critical accounting judgement. In reaching this determination, the Directors have taken account of the Group's trading for 2023 and the budget for 2024.
The Group reported a net cash position of £109.1m on 31 December 2023, but the Directors believe that the average daily net cash, after adjusting for the full year impact of the share buybacks, averaged £50m during 2023, provides a better indication of the underlying position and is a better indicator of the Group's liquidity. The Group has modelled its cash flow outlook for the period to 30 June 2025 and the base forecast indicates significant liquidity headroom will be maintained above the Group's borrowing facilities and that financial covenants will be met throughout the period, including the covenant tests on 30 June 2024, 31 December 2024 and 30 June 2025.
The Board approved a budget for 2024 which reflects margin and profit growth compared to the prior year. The 2024 budget is considered to be the base case projection for assessing Going Concern and is based on the following assumptions:
· Forecast built up on a contract-by-contract basis for the next twelve months and rolled forward. The forecast for 2024 is based upon revenues generated from existing customer relationships, and a business that is generating contract margins that are in-line with recent run-rates.
· The forecast assumes no new work is secured. The base case assumes that contracts are resecured on retender, but reflects some revenue reduction from existing clients, when it is currently anticipated that there may be no further opportunity upon expiry of the current contract.
· The model also reflects the normalisation of the Asylum (AASC) contract, with revenues reducing to a level closer to the original expectation.
· The model assumes no significant changes in working capital performance.
· The model assumes small scale property purchases to augment the delivery of the AASC contract.
· Future dividends continue in line with current policy.
· A share buyback programme is assumed to be completed equating to 10% of the issued share capital at the start of the current financial year. No further buybacks have been assumed beyond the current shareholder authority.
The Group is well positioned, underpinned by the non-discretionary nature of the Group's activities and public sector client group. The Board has communicated its capital allocation policy to stakeholders, and a key pillar of this policy is to maintain a net cash position on a daily basis.
In making its going concern assessment, the Directors are required to consider as to whether there is a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for at least 12 months following the signing of these financial statements. The Board has adopted a going concern period for this purpose up to 30 June 2025. This assessment considers whether the Group will be able to maintain adequate liquidity headroom above the level of its borrowing facilities and to operate within the financial covenants applicable to those facilities which will be measured on 30 June 2024, 31 December 2024 and 30 June 2025. On 31 December 2023, the Group held £70m of committed borrowing facilities, maturing in December 2026. The principal borrowing facilities are subject to covenants as detailed within the banking and financial covenants sub-section of the Finance Review section of the Strategic Report. The Strategic Report also details the principal risks and uncertainties and how the Group manages its risks.
In making its assessment of Going Concern, the Board has confirmed that there have been no post balance sheet changes that have a material impact on the business or affect liquidity.
A range of scenarios that encompass the principal risks have been applied to the base case and are set out below. These downside cases were prepared by management to illustrate the impact of adverse changes in key variables used within the base case forecast and projections. These downside cases were intended to illustrate a reasonable worst-case scenario that could affect solvency or liquidity in "severe but plausible" scenarios.
The Directors have considered three scenarios and the following sensitivities have been applied to each downside case:
· Downside case 1: a significant reduction of 50% in revenue relating to the Group's largest contract (AASC).
· Downside case 2: a significant margin dilution event, possibly caused by significant operational failure, labour shortages or supply chain disruption. The downside scenario modelled a 1.5% reduction in operating margin. Given the low-margin nature of the business, a small increase in the cost base which is not recovered in charge rate increases can cause significant margin dilution.
· Downside case 3: an event linked to a Cyber breach, impacting upon lead operating systems causing an additional 20-days revenue tied up in working capital.
No mitigating actions were included within any of these downside scenarios which was considered conservative and unrealistic. Before applying mitigations, none of the three downside cases detailed above resulted in the Group exhausting its liquidity or breaching covenants. Mitigating actions that would be available to management include a reduction in central overheads, a reduction in discretionary capital expenditure, changes to capital allocation policy (including the ordinary dividend) and more robust working capital management around covenant test dates. In addition, upsides that are available to the base case includes generating an improved margin at a local contract level over and above the current run-rate and securing new contract awards.
The Viability Review concluded that climate-related risks would not have a significant impact on the business within the five-year viability review period. As such, climate was not modelled in respect of the shorter Going Concern review period.
The Group has carried out stress tests against the base case to determine the performance levels that would result in a breach of covenants or a reduction of headroom against its borrowing facilities to £nil. The Directors carried out reverse stress testing, increasing the severity of the assumptions to measure the trigger points at which the going concern of the Group could be impacted. A reverse stress test was conducted to identify the magnitude of trading profit decline required before the Group breaches its debt covenants. All stress test scenarios would require a very severe deterioration compared to the base case forecasts.
In the most extreme reverse stress test:
· The Directors modelled a reduction in profit which would trigger a breach in covenants. The base case annualised profit of c.£40m would need to decline to an annualised loss in excess of £40m. This profit reduction is considered to be remote given Mears' long-term historical performance. During a Covid-impacted year ended 31 December 2020, Mears reported a loss before tax of c.£15m.
· The Directors modelled a reduction in revenue which would trigger a breach is covenants. Revenue would need to decline by in excess of 40% when compared to the base case, to result in a breach of covenants. This revenue reduction is considered to be remote given the high proportion of Mears' revenue that is attached to long-term contractual arrangements. During a Covid-impacted year ended 31 December 2020, Mears' revenue declined by less than 10%.
After making these assessments, the Directors consider any scenario or combination of scenarios which could cause the business to be no longer a going concern to be remote. The Directors have a reasonable expectation that the Company and its subsidiaries have adequate resources to continue in operational existence until 30 June 2025. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.
Fair value
The Group measures certain assets and liabilities at fair value on a recurring
basis, including contingent consideration and assets in the Group's defined
benefit pension schemes.
Trade and other receivables, trade and other payables and other loans are
initially measured at fair value and are subsequently held at amortised cost.
Other assets are measured at fair value when they are assessed for impairment
or on classification as held for sale.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The Group uses valuation techniques that maximise the
use of relevant observable inputs using the following valuation hierarchy,
ordered from highest to lowest priority:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included in level 1 that are
observable either directly or indirectly.
Level 3 - Unobservable inputs, typically derived from the Group's own
information with any necessary adjustments to eliminate factors specific to
the Group.
For assets and liabilities measured at fair value on a recurring basis, the
Group determines whether transfers have occurred between levels in the
hierarchy by assessing the lowest level input that is significant to the most
recent measurement.
Details of the particular valuation techniques used by the Group are provided
in the relevant notes for each type of asset or liability measured at fair
value.
Use of judgements and estimates
The preparation of financial statements requires management to make estimates
and judgements that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenditure during the
reported period. The estimates and associated judgements are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of
making judgements about carrying values of assets and liabilities that are not
readily apparent from other sources.
The estimates and underlying judgements are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods.
In the preparation of these preliminary results, key estimates and judgements
have been made by management concerning the following:
- provisions necessary for certain liabilities, including discount
rates used in estimating such provisions;
- estimates used in forecasts used to assess future profitability;
- discount rates used when conducting impairment reviews;
- the discounts used and other judgements involved in the
recognition of right of use assets for lease accounting;
- the timing of revenue recognition;
- the recoverability of contract assets; and
- actuarial estimates in respect of defined benefit pension
schemes.
Actual amounts could differ from those estimates. Further details of key
estimates and judgements are provided in the appropriate notes.
2. REVENUE
Accounting policy
Revenue is recognised in accordance with IFRS 15 'Revenue from Contracts with
Customers'. IFRS 15 provides a single, principles-based, five-step model to be
applied to all sales contracts. It is based on the transfer of control of
goods and services to customers. The detail below sets out the principal types
of contract and how the revenue is recognised in accordance with IFRS 15.
Repair and maintenance contracts
For contracts in this category, the customer raises orders on demand, for
example to carry out responsive repairs. Revenue is derived from a mixture of
lump-sum periodic payments and task-based payments depending on the terms of
the individual contract.
Where a lump-sum payment is in place it may cover the administrative element
of the contract or may cover the majority of the tasks undertaken within that
contract with exclusions to this being charged in addition to the lump-sum
charge. For the works covered by the lump-sum payment, the performance
obligation is being available to deliver the goods and services in the scope
of the contract, not the performance of the individual works orders
themselves. Revenue is recognised on a straight-line basis as performance
obligations are being met over time.
For works orders not covered by a lump-sum payment, each works order
represents a distinct performance obligation and, as the customer controls the
asset being enhanced through the works, the performance obligation is
satisfied over time. Each works order can be broken down into one or more
distinct tasks which are either complete or not complete. The stage of
completion of the works order is assessed by looking at which tasks are
complete. The transaction price for partly completed works orders is
recognised as cost plus expected margin. The transaction price for completed
works orders is the invoice value, which is typically determined by a pricing
schedule referred to as a Schedule of Rates that provides a transaction price
for each particular task.
Some contracts may include an element of variable revenue based on certain key
performance indicators (KPIs). These are recognised either at a point in time
or over time, depending on the nature of the KPI and the contractual agreement
in which it is contained. Where there is uncertainty in the measurement of
variable consideration, at both the start of the contract and subsequently,
management will consider the facts and circumstances of the contract in
determining either the most likely amount of variable consideration when the
outcome is binary, or the expected value based on a range of possible
considerations. Included within this assessment will be the extent to which
there is a high probability that a significant reversal in variable
consideration revenues will not occur once the uncertainty is subsequently
resolved. This assessment will include consideration of the following factors:
the total amount of the variable consideration; the proportion of
consideration susceptible to judgements of customers or third parties, for
example KPIs; the length of time expected before resolution of the
uncertainty; and the Group's previous experience of similar contracts.
Contracting projects
For contracting projects, the contract states the scope and specification of
the construction works to be carried out, for a fixed price. Mears
is continuously satisfying this single performance obligation as cost is
incurred, determining progress against the performance obligation on either an
input or an output basis. The customer controls the site or output as the work
is being performed on it and therefore revenue is recognised over time where
there is an enforceable right to payment for works completed to date and the
work completed does not create an asset with an alternative use to the Group.
An assessment is made of costs incurred to date and the costs required to
complete the project. If a project is not deemed to be profitable, the
unavoidable costs of fulfilling the contract are provided for immediately.
This category also includes construction contracts where an end customer has
not yet been identified and the revenue is recognised at the point of sale of
the property, rather than over time.
Property income
Where the Group is acting as principal, lessor operating lease revenue is
recognised in revenue on a straight-line basis over the tenancy.
Where the Group is providing a management service, Mears recognises revenue as
an agent (the net management fee) on a straight-line basis. Where significant
initial costs are required to make good the housing to perform Housing
Management activities, the costs directly attributable to the initial upgrade
will be recognised as costs incurred to fulfil a contract and held within
current assets, to the extent that it is determined that costs are
recoverable.
Where the Group is providing an accommodation and support service, revenue is
recognised at a point in time for each night that the accommodation is
occupied.
Some contracts may include an element of variable revenue based on certain
KPIs. This is recognised on the same basis as above.
Where the Group enters into arrangements with customers for the provision of
housing, an assessment is made as to whether this income is recognised under
IFRS 15 or IFRS 16. The contract between the Group and the customer is deemed
to contain a lease where the contract conveys the right to control an
identified asset for a period of time in exchange for consideration. In this
instance, the rental income is recognised on a straight-line basis over the
life of the lease. All such sub-leased residential property leases are
classified as operating leases. Revenue in respect of sub-leased residential
property is disclosed separately.
Care services
The standalone selling prices for providing care are overtly stated in the
contract, and the method of application of the rate of charge is on a unit of
time basis, usually expressed as a rate per visit. Revenue will be recognised
in respect of this single performance obligation, by reference to the
chargeable rate and time for completed care visits in the period.
From time to time, care contracts with customers include a fixed fee per
period for performing a consistent scope of care services. For these contract
types, the revenue recognition is consistent with lump-sum payments included
in repair and maintenance contracts, as described above.
Other
From time to time, the Group receives revenue that does not fall within any of
the categories above but is not individually significant enough to require a
specific policy. In these cases, the revenue is considered separately and
recognised in accordance with IFRS 15.
Key sources of estimation uncertainty
Contract recoverability
Determining future contract profitability requires estimates of future
revenues and costs to complete. In making these assessments there is a degree
of inherent uncertainty. The Group utilises the appropriate expertise in
determining these estimates and has well-established internal controls to
assess and review the expected outcome.
Critical judgements in applying the Group's accounting policies
Revenue recognition
The estimation techniques used for revenue and profit recognition in respect
of contracting and variable consideration contracts require judgements to be
made about the stage of completion of certain contracts and the recovery of
contract assets. Each contract is treated on its merits and subject to a
regular review of the revenue and costs to complete that contract.
The Group's revenue disaggregated by pattern of revenue recognition is as
follows:
2023 2022
£'000 £'000
Revenue from contracts with customers
Repairs and maintenance 453,981 451,063
Contracting 70,980 83,463
Property income 516,769 376,296
Care services 20,058 19,544
Other 1,005 345
1,062,793 930,711
Lease income 26,534 28,902
1,089,327 959,613
Repairs and maintenance and care service revenue is typically invoiced between
1 and 30 days from completion of the performance obligation. Contracting
revenue is typically invoiced based on the stage of completion of the overall
contract. Property income is typically invoiced monthly in advance. Payment
terms for revenue invoiced are typically 30 to 60 days from the date of
invoice.
A maturity analysis of future minimum lessor income as at 31 December is shown
in the table below:
2023 2022
£'000 £'000
Less than 1 year 4,591 3,245
Between 1 and 2 years 2,871 1,537
Between 2 and 3 years 2,871 1,531
Between 3 and 4 years 2,163 1,531
Between 4 and 5 years 1,282 1,150
Over 5 years 5,178 393
18,956 9,387
3. SEGMENT REPORTING
Accounting policy
Segment information is presented in respect of the Group's operating segments
based on the format that the Group reports to its chief operating decision
maker for the purpose of allocating resources and assessing performance.
The Group considers that the chief operating decision maker comprises the
Executive Directors of the business.
The Executive Directors manage the group as a single Housing business, but
information provided to the Board and historically to stakeholders has
included a split between Maintenance, Management and Development. Therefore,
management has concluded that providing segmental information along the same
lines would be helpful to the users of the preliminary results.
2023 2022
Maintenance Management Development Total Maintenance Management Development Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Revenue 543,279 543,345 2,703 1,089,327 535,336 405,776 18,501 959,613
Impairments of right of use assets - 6,223 - 6,223 - - - -
Profit/(loss) before tax 22,061 25,711 (854) 46,918 11,777 24,281 (1,114) 34,944
Tax expense (10,258) (6,441)
Profit for the year 36,660 28,503
All revenue and all non-current assets arise within the United Kingdom. All of
the revenue reported is external to the Group. The Group's largest single
customer relationship is in respect of the Asylum Accommodation and Support
Contract (AASC) with the Home Office, included within the Management segment.
At the time that this contract was won, the Group expected to report annual
revenues of around £120m, which would, under normal conditions, amount to
around 15% of Group revenues. The AASC has experienced elevated volumes as a
result of a backlog linked to the challenges of the Covid-19 pandemic. As a
result, this customer relationship accounted for over 40% of Group revenues in
2023 and this elevated position has continued into 2024. In the longer term,
this contract is expected to reduce back to a normal level. No other customer
comprises more than 10% of reported revenue.
For the purposes of the disaggregation of revenue in note 2, all property
income and lease income is included within the Management segment and the
Development segment contains only contracting revenue. All other revenue is
included within the Maintenance segment.
4. OPERATING COSTS
Operating costs, relating to continuing activities, include the following:
Note 2023 2022
£'000 £'000
Share-based payments 7 1,040 599
Depreciation of property, plant and equipment 14 7,305 8,021
Depreciation of right of use assets 15 50,908 43,486
Impairment of right of use assets 15 6,223 -
Amortisation of acquisition intangibles 13 244 245
Amortisation of other intangibles 13 1,635 2,055
Loss on disposal of property, plant and equipment 54 2
Loss on disposal of intangibles 26 -
Profit on disposal of right of use assets (180) (227)
Increase in onerous contract provisions 21 8,784 -
Increase in other provisions 21 5,738 3,617
Fees payable for audit and non-audit services during the year were as follows:
2023 2022
£'000 £'000
In respect of continuing activities:
Fees payable to the auditor for the audit of the Group's financial statements 457 416
Other fees payable to the auditor in respect of:
· auditing of accounts of subsidiary undertakings pursuant to legislation 550 500
· additional fees in respect of the prior year audit 145 65
Total auditor's remuneration 1,152 981
5. FINANCE INCOME AND FINANCE COSTS
2023 2022
£'000 £'000
Interest charge on overdrafts and loans (638) (625)
Interest on lease obligations (9,899) (7,617)
Finance costs on bank loans, overdrafts and leases (10,537) (8,242)
Other interest (642) (58)
Interest charge on defined benefit pension obligation (2) (74)
Total finance costs (11,181) (8,374)
Interest income resulting from short-term deposits 4,360 870
Interest income resulting from defined benefit pension asset 1,164 769
Other interest income 415 394
Finance income 5,939 2,033
Net finance charge (5,242) (6,341)
6. EMPLOYEES
Staff costs during the year were as follows:
2023 2022
£'000 £'000
Wages and salaries 176,226 165,348
Social security costs 18,666 16,795
Other pension costs 6,963 8,797
201,855 190,940
The average number of employees of the Group during the year was:
2023 2022
Site workers 2,443 2,482
Carers 559 558
Office and management 2,134 1,950
5,136 4,990
7. SHARE-BASED EMPLOYEE REMUNERATION
Accounting policy
All share-based payment arrangements are recognised in the preliminary results
in accordance with IFRS 2.
The Group operates equity-settled share-based remuneration plans for its
employees. All employee services received in exchange for the grant of any
share-based remuneration are measured at their fair values. These are
indirectly determined by reference to the fair value (excluding the effect of
non-market-based vesting conditions) of the share options awarded. Their value
is determined at the date of grant and is not subsequently remeasured unless
the conditions on which the award was granted are modified. The fair value at
the date of the grant is calculated using the Monte Carlo option pricing model
and the cost is recognised on a straight-line basis over the vesting period.
Adjustments are made to reflect expected and actual forfeitures during the
vesting period. For Save As You Earn (SAYE) plans, employees are required to
contribute towards the plan. This non-vesting condition is taken into account
in calculating the fair value of the option at the grant date.
All share-based remuneration is ultimately recognised as an expense in the
Consolidated Statement of Profit or Loss. For equity-settled share-based
payments there is a corresponding credit to the share-based payment reserve.
Upon exercise of share options, the proceeds received net of any directly
attributable transaction costs up to the nominal value of the shares issued
are allocated to share capital, with any excess being recorded as share
premium.
As at 31 December 2023 the Group maintained four (2022: three) active
share-based payment schemes for employee remuneration.
Details of the share options outstanding and movement during the year are as
follows:
2023 2022
Number Weighted average exercise price Number Weighted average exercise price
'000 p '000 p
Outstanding at 1 January 4,552 99 4,827 110
Granted 1,132 1 442 1
Forfeited or lapsed (418) 177 (643) 108
Exercised (2,713) 94 (74) 116
Outstanding at 31 December 2,553 48 4,552 99
The weighted average share price at the date of exercise for share options
exercised during the period was 279p. At 31 December 2023, 0.5m options had
vested and were still exercisable at prices between 1p and 429p. These options
had a weighted average exercise price of 238p and a weighted average remaining
contractual life of 4.5 years.
The fair values of options granted were determined using the Monte Carlo
option pricing model. Significant inputs into the calculation include the
market price at the date of grant, the exercise price and share price
volatility. Furthermore, the calculation incorporates an estimate of the
future dividend yield and the risk-free interest rate. The share price
volatility was determined from the daily log-normal distributions of the
Company share price over a period commensurate with the expected life as
calculated back from the date of grant. The risk-free interest rate utilised
the zero-coupon bond yield derived from UK Government bonds as at the date of
calculation for a life commensurate with the expected life. Adjustments are
made to reflect expected and actual forfeitures during the vesting period due
to failure to satisfy service conditions.
There were 1.13m options granted during the year and 0.42m options that lapsed
during the year. The market price at 31 December 2023 was 310p and the range
during 2023 was 195p to 311p.
All share-based employee remuneration will be settled in equity. The Group has
no legal obligation to repurchase or settle the options.
The Group recognised the following expenses related to share-based payments:
2023 2022
£'000 £'000
Giving rise to share-based payment reserve:
All-employee schemes 188 165
Executive schemes 852 434
1,040 599
The Group is currently running four active schemes, detailed below:
Sharesave plan (All-employee scheme)
Options are available to all employees. Options are granted for a period of
three years. Options are exercisable at a price based on the quoted market
price of the Company's shares at the time of invitation, discounted by up to
20%. Options are forfeited if the employee leaves Mears Group before the
options vest, which impacts the number of options expected to vest. If an
employee stops saving but continues in employment, this is treated as a
cancellation, which results in an acceleration of the share-based payment
charge.
Company Share Option Plan (Executive scheme)
The Company operates a discretionary unapproved share plan and a Company Share
Option Plan. Options are exercisable at a price below market value at the date
of grant and often at nominal value. The vesting period is three years. If the
options remain unexercised after a period of 10 years from the date of grant,
the options expire. Options are forfeited if the employee leaves Mears Group
before the options vest. No awards to Executive Directors are proposed under
these plans.
Long-Term Incentive Plan (Executive scheme)
The Long-Term Incentive Plan provides for awards of free shares (i.e. either
conditional shares or nominal cost options) normally on an annual basis which
are eligible to vest after three years subject to continued service and the
achievement of challenging performance conditions. The first award under this
scheme was made during 2021. Options are granted under this scheme to key
senior management subject to performance conditions as detailed on page 92 of
the Remuneration Report.
Deferred Share Bonus Plan (Executive scheme)
The Deferred Share Bonus Plan relates to annual bonus payments where typically
33% are deferred into shares and vest subject to continued employment.
Individuals may be able to receive a dividend equivalent payment on deferred
bonus shares at the time of vesting equal to the value of dividends that would
have accrued during the vesting period. The dividend equivalent payment may
assume the reinvestment of dividends on a cumulative basis. Clawback
provisions may apply for three years from the date of payment of any bonus or
the grant of any deferred bonus share award.
8. TAX EXPENSE
Accounting policy
Current tax assets and/or liabilities comprise those obligations to, or claims
from, fiscal authorities that are unpaid at the balance sheet date. They are
calculated according to the tax rates and tax laws applicable to the
accounting periods to which they relate, based on the taxable profit for the
year.
Where an item of income or expense is recognised in the Consolidated Statement
of Profit or Loss, any related tax generated is recognised as a component of
tax expense in the Consolidated Statement of Profit or Loss. Where an item is
recognised directly to equity or presented within the Consolidated Statement
of Comprehensive Income, any related tax generated is treated similarly.
Deferred taxation is the tax expected to be repayable or recoverable on
differences between the carrying amounts of assets and liabilities and
corresponding tax bases used in the computation of taxable profit and is
accounted for using the balance sheet liability method.
Deferred taxation liabilities are generally recognised on all taxable
temporary differences in full with no discounting. Deferred taxation assets
are recognised to the extent that it is probable that taxable profits will be
available against which deductible temporary differences can be utilised.
However, deferred tax is not provided on the initial recognition of goodwill,
nor on the initial recognition of an asset or liability, unless the related
transaction is a business combination or affects tax or accounting profit.
Deferred taxation is calculated using the tax rates and laws that are expected
to apply in the period when the liability is settled or the asset
is realised, provided they are enacted or substantively enacted at the
balance sheet date. The carrying value of deferred taxation assets is reviewed
at each balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available against which
taxable temporary differences can be utilised. Deferred tax is charged or
credited to either the Consolidated Statement of Profit or Loss, the
Consolidated Statement of Comprehensive Income or equity to the extent that it
relates to items charged or credited. Deferred tax relating to items charged
or credited directly to equity is also credited or charged to equity.
Tax recognised in the Consolidated Statement of Profit or Loss:
2023 2022
£'000 £'000
United Kingdom corporation tax 10,854 6,449
Adjustment in respect of previous periods 39 (675)
Total current tax charge recognised in Consolidated Statement of Profit or 10,893 5,774
Loss
Deferred taxation charge:
· on defined benefit pension obligations 480 (41)
· on share-based payments (119) 27
· on capital allowances (483) 65
· on amortisation of acquisition intangibles (75) (65)
· on short-term temporary timing differences - 149
· on corporate tax losses - 264
· other timing differences 57 18
Adjustment in respect of previous periods (495) 250
Total deferred taxation recognised in Consolidated Statement of Profit or Loss (635) 667
Total tax charge recognised in Consolidated Statement of Profit or Loss on 10,258 6,441
continuing operations
Total tax charge recognised in Consolidated Statement of Profit or Loss on - 48
discontinued operations
Total tax charge recognised in Consolidated Statement of Profit or Loss 10,258 6,489
The charge for the year can be reconciled to the result for the year as
follows:
2023 2022
£'000 £'000
Profit for the year on continuing operations before tax 46,918 34,944
Profit for the year on discontinued operations before tax - 542
Result for the year before tax 46,918 35,486
Result for the year multiplied by standard rate of corporation tax in the 11,039 6,742
United Kingdom for the period of 23.5% (2022: 19.0%)
Effect of:
· expenses not deductible for tax purposes 88 362
· income not subject to tax (352) (264)
· tax impact of employee share schemes (61) 129
· adjustment in respect of prior periods (456) (480)
Actual tax charge 10,258 6,489
Deferred tax is recognised on temporary differences between the treatment of
items for both tax and accounting purposes. Deferred tax on the amortisation
of acquisition intangibles is a temporary difference and arises because no tax
relief is due on this kind of amortisation.
Tax losses generated in previous years which are expected to be utilised
against future profits are recognised as a deferred tax asset and a subsequent
charge arises as those losses are utilised. No deferred tax asset is
recognised in respect of losses of £1.4m (2022: £25.5m) across several
entities in the Group as it is not expected that they will be eligible to be
utilised against profits in the future. The reduction in unrecognised losses
during the year is due to those in respect of two dormant Group entities being
written off, as there was no prospect of them being utilised in future.
Capital allowances represent tax relief on the acquisition of property, plant
and equipment and are spread over several years at rates set by legislation.
These differ from depreciation, which is an estimate of the use of an item of
property, plant and equipment over its useful life. Deferred tax is recognised
on the difference between the remaining value of such an asset for tax
purposes and its carrying value in the accounts.
Relief is provided from UK Corporation Tax on the difference between the
exercise price of share options exercised by employees and their market value
at the point of exercise. During 2023, an all-employee share scheme vested
that had been granted in 2020 when the Group's share price was significantly
lower. This resulted in significant relief on the exercise of the share
options that is not anticipated to reoccur.
The following tax has been charged to other comprehensive income or equity
during the year:
2023 2022
£'000 £'000
Deferred tax credit recognised in other comprehensive income
· on defined benefit pension obligations (1,482) (2,449)
Total deferred tax credit recognised in other comprehensive income (1,482) (2,449)
Current tax credit recognised directly in equity
· on share-based payments (991) -
Total current tax credit recognised in equity (991) -
Deferred tax charge/(credit) recognised directly in equity
· on share-based payments 124 (142)
Total deferred tax charge/(credit) recognised in equity 124 (142)
BEPS Pillar Two
Pillar Two legislation has been enacted in the UK and will be effective for
the Group's financial year beginning 1 January 2024. The Group has performed
an assessment of its potential exposure to Pillar Two income taxes based on
the most recent information available regarding the financial performance of
the constituent entities in the Group. Based on the assessment performed, the
Pillar Two effective tax rate is above 15% and management is not currently
aware of any circumstances under which this might change. Therefore, the Group
does not expect a potential exposure to Pillar Two top-up taxes.
9. DISCONTINUED ACTIVITIES
During 2020, the Group completed the disposal of its Domiciliary Care business
and disposed of its Planning Solutions business. The 2022 financial statements
recognised profit after tax and operating cash outflows of £0.5m in respect
of discontinued activities, as well as a £7.3m cash inflow representing the
final receipt of contingent consideration in respect of the Planning Solutions
business. There are no amounts recognised in 2023 and further details of the
disposals are available in the prior year financial statements.
10. DIVIDENDS
Accounting policy
Dividend distributions payable to equity shareholders are included in 'Current
financial liabilities' when the dividends are approved in a general meeting
prior to the balance sheet date.
The following dividends were paid on ordinary shares in the year:
2023 2022
£'000 £'000
Final 2022 dividend of 7.25p (2022: final 2021 dividend of 5.50p) per share 7,932 6,092
Interim 2023 dividend of 3.70p (2022: interim 2022 dividend of 3.25p) per 3,828 3,600
share
11,760 9,692
The Directors recommend a final dividend of 9.30p per share. This has not been
recognised within the preliminary results as no obligation existed at 31
December 2023.
11. EARNINGS PER SHARE
Continuing Discontinued Continuing and discontinued
2023 2022 2023 2022 2023 2022
p p p p p p
Earnings per share 32.90 25.07 - 0.44 32.90 25.51
Diluted earnings per share 31.94 24.51 - 0.43 31.94 24.94
For the purpose of calculating earnings per share (EPS), earnings have been
calculated as follows:
Continuing Discontinued Continuing and discontinued
2023 2022 2023 2022 2023 2022
£'000 £'000 £'000 £'000 £'000 £'000
Profit for the year 36,660 28,503 - 494 36,660 28,997
Attributable to non-controlling interests (1,456) (690) - - (1,456) (690)
Earnings 35,204 27,813 - 494 35,204 28,307
The calculation of EPS is based on a weighted average of ordinary shares in
issue during the year. The diluted EPS is based on a weighted average of
ordinary shares calculated in accordance with IAS 33 'Earnings per Share',
which assumes that all dilutive options will be exercised. IAS 33 defines
dilutive options as those whose exercise would decrease earnings per share or
increase loss per share from continuing operations.
2023 2022
Millions Millions
Weighted average number of shares in issue: 106.99 110.96
Dilutive effect of share options 3.23 2.52
Weighted average number of shares for calculating diluted earnings per share 110.22 113.48
The opening number of shares in issue for 2024 is shown below:
2024 Millions
Opening number of shares in issue 101.55
Treasury shares to exclude (1.89)
Opening number of shares in issue for calculating earnings per share 99.66
12. GOODWILL
Accounting policy
Goodwill arises on the acquisition of subsidiaries and represents any excess
of the cost of the acquired entity over the Group's interest in the fair value
of the entity's identifiable assets and liabilities acquired, and is
capitalised as a separate item. Goodwill is recognised as an intangible asset.
Under the business combinations exemption of IFRS 1, goodwill previously
written off directly to reserves under UK Generally Accepted Accounting
Practice (GAAP) is not recycled to the Consolidated Statement of Profit or
Loss on calculating a gain or loss on disposal.
Impairment
For the purposes of assessing impairment, assets are grouped at the lowest
levels for which there are separately identifiable cash flows: Cash Generating
Units (CGUs). Goodwill is allocated to those groups of CGUs, that are expected
to benefit from synergies of the related business combination and represent
the lowest level within the Group at which goodwill is monitored for internal
management purposes.
Goodwill or groups of CGUs that include goodwill and those intangible assets
not yet available for use are tested for impairment at least annually. All
other individual assets or CGUs are tested for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.
An impairment loss is recognised in the Consolidated Statement of Profit or
Loss for the amount by which the asset's or CGU's carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of fair value,
reflecting market conditions less costs to sell, and value in use based on an
internal discounted cash flow evaluation. Impairment losses recognised for
groups of CGUs, to which goodwill has been allocated, are credited initially
to the carrying amount of goodwill. Any remaining impairment loss is charged
pro-rata to the other assets in the group of CGUs. With the exception of
goodwill, all assets are subsequently reassessed for indications that an
impairment loss previously recognised may no longer exist.
Goodwill arising on consolidation Purchased goodwill Total
£'000 £'000 £'000
Gross carrying amount
At 1 January 2022 114,831 4,042 118,873
Acquisition of subsidiary 2,995 - 2,995
At 1 January 2023 and 31 December 2023 117,826 4,042 121,868
Accumulated impairment losses
At 1 January 2022, 1 January 2023 and 31 December 2023 - - -
Carrying amount
At 31 December 2023 117,826 4,042 121,868
At 31 December 2022 117,826 4,042 121,868
Goodwill on consolidation arises on the excess of cost of acquisition over the
fair value of the net assets acquired on purchase of a company.
Purchased goodwill arises on the excess of cost of acquisition over the fair
value of the net assets acquired on the purchase of the trade and assets of a
business by the Group.
Goodwill is not amortised but is reviewed for impairment on an annual basis or
more frequently if there are any indications that goodwill may be impaired.
Goodwill acquired in a business combination is allocated to groups of CGUs
according to the level at which management monitors that goodwill. Goodwill is
carried at cost less accumulated impairment losses.
The carrying value of goodwill is allocated to the following groups of CGUs:
Goodwill arising on consolidation Purchased goodwill Total
2023 2022 2023 2022 2023 2022
£'000 £'000 £'000 £'000 £'000 £'000
Maintenance (excluding Housing with Care) 65,290 65,290 4,042 4,042 69,332 69,332
Management 33,447 33,447 - - 33,447 33,447
Housing with Care 19,089 19,089 - - 19,089 19,089
117,826 117,826 4,042 4,042 121,868 121,868
The Group's cash inflows are largely independent at the individual branch
level and each branch is therefore considered a CGU. However, the goodwill of
the Group contributes to the cash inflows of multiple CGUs. It is therefore
allocated to groups of CGUs and monitored for internal management purposes
primarily at the operating segment level. The goodwill of Housing with Care is
separately monitored and therefore allocated to a separate group of CGUs to
which it relates.
An asset is impaired if the carrying value exceeds the CGU's recoverable
amount, which is based on value in use. At 30 September 2023 impairment
reviews were performed by comparing the carrying value with the value in use
for the groups of CGUs to which goodwill has been allocated.
The value in use for each group of CGUs is calculated from the Board-approved
one-year budgeted cash flows and extrapolated cash flows for the next four
years discounted at a post-tax discount rate over a five-year period with a
terminal value. The impairment reviews incorporated a terminal growth
assumption, which is conservative when compared with the UK long-term growth
rate and the underlying demographics, which will be positive for the Group's
core markets.
The estimated growth rates are based on knowledge of the relevant sector and
market and represent management's base level expectations for future growth.
Changes to revenue and direct costs are based on past experience and
expectation of future changes within the markets of the CGUs. All CGUs have
the same access to the Group's treasury function and borrowing arrangements to
finance their operations.
Management considers that reasonably possible changes in these assumptions
would not cause the carrying amount of a group of CGUs to exceed its
recoverable amount.
The rates used were as follows:
Post-tax discount rate Pre-tax Volume Terminal
discount rate growth rate (years 1-5) growth
rate
Maintenance 10.90% 14.93% 2.00% 1.50%
Management 10.90% 13.21% 2.00% 1.50%
Housing with Care 10.90% 15.00% 3.00% 1.50%
13. OTHER INTANGIBLE ASSETS
Accounting policy
In accordance with IFRS 3 (Revised) 'Business Combinations', an intangible
asset acquired in a business combination is deemed to have a cost to the Group
of its fair value at the acquisition date. The fair value of the intangible
asset reflects market expectations about the probability that the future
economic benefits embodied in the asset will flow to the Group. Where an
intangible asset might be separable, but only together with a related tangible
or intangible asset, the group of assets is recognised as a single asset
separately from goodwill where the individual fair values of the assets in
the group are not reliably measurable. Intangible assets are amortised over
the useful economic life of those assets.
Development costs incurred on software development are capitalised when all
the following conditions are satisfied:
· Completion of the software module is technically feasible so that it will
be available for use.
· The Group intends to complete the development of the module and use it.
· The software will be used in generating probable future economic
benefits.
· There are adequate technical, financial and other resources to complete
the development and to use the software.
· The expenditure attributable to the software during its development can
be measured reliably.
Development costs not meeting the criteria for capitalisation are expensed as
incurred. Careful judgement by management is applied when deciding whether the
recognition requirements for development costs have been met. This is
necessary as the economic success of any development is uncertain and may be
subject to future technical problems at the time of recognition. Judgements
are based on the information available at each balance sheet date. In
addition, all internal activities related to the research and development of
new software are continually monitored by management.
The cost of an internally generated intangible asset comprises all directly
attributable costs necessary to create, produce and prepare the asset to be
capable of operating in the manner intended by management. Directly
attributable costs include employee costs incurred on software development.
Amortisation commences upon completion of the asset and is shown within other
administrative expenses. Until the asset is available for use on completion
of the project, the assets are subject to impairment testing only. Development
expenditure is amortised over the period expected to benefit.
The identifiable intangible assets and associated periods of amortisation are
as follows:
Order book over the period of the order book
Client relationships over the period expected to benefit
Supplier relationships over the period expected to benefit
Development expenditure over the useful life of the resulting software, typically five to ten years
Software 25% p.a., reducing balance
The useful economic lives of intangible assets are reviewed annually and
amended if appropriate.
Acquisition intangibles Development expenditure £'000 Software £'000 Total intangibles £'000
Client relationships £'000 Order Supplier relationships £'000 Total acquisition intangibles £'000
book
£'000
Gross carrying amount
At 1 January 2022 65,987 17,770 2,172 85,929 21,142 - 107,071
Reclassification - - - - - 6,087 6,087
Additions - - - - 1,090 274 1,364
Acquired with subsidiary - - - - 1,117 - 1,117
Disposals (61,097) (17,770) (2,172) (81,039) - (85) (81,124)
At 1 January 2023 4,890 - - 4,890 23,349 6,276 34,515
Additions - - - - 1,041 458 1,499
Disposals - - - - (5,996) (4,012) (10,008)
At 31 December 2023 4,890 - - 4,890 18,394 2,722 26,006
Amortisation
At 1 January 2022 63,338 17,770 2,172 83,280 17,181 - 100,461
Reclassification - - - - - 5,426 5,426
Provided in the year 245 - - 245 1,849 206 2,300
Eliminated on disposal (61,097) (17,770) (2,172) (81,039) - (85) (81,124)
At 1 January 2023 2,486 - - 2,486 19,030 5,547 27,063
Provided in the year 244 - - 244 1,415 220 1,879
Eliminated on disposal - - - - (5,996) (3,986) (9,982)
At 31 December 2023 2,730 - - 2,730 14,449 1,781 18,960
Carrying amount
At 31 December 2023 2,160 - - 2,160 3,945 941 7,046
At 31 December 2022 2,404 - - 2,404 4,319 729 7,452
Development expenditure is an internally developed intangible asset and
relates to the development of the Group's Housing job management system and
decarbonisation assessment software.
Development expenditure is amortised over its useful economic life of either
five or ten years, depending on the resulting software. The weighted average
remaining economic life of the asset is 3.8 years (2022: 3.9 years).
All amortisation is included within other administrative expenses.
14. PROPERTY, PLANT AND EQUIPMENT
Accounting policy
Items of property, plant and equipment are stated at historical cost, net of
depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Subsequent costs are included in
the asset's carrying amount or recognised as a separate asset,
as appropriate, only when it is probable that future economic benefits
associated with the item will flow into the Group and the cost of the item can
be measured reliably. All other repairs and maintenance are charged to the
Consolidated Statement of Profit or Loss during the financial period in which
they are incurred.
Freehold land is not depreciated. Depreciation on other assets is calculated
to write down the cost less estimated residual value over their estimated
useful economic lives. The rates generally applicable are:
Freehold buildings 2% p.a., straight line
Leasehold improvements over the period of the lease or expected useful life of the improvements,
straight line
Plant and machinery 20% p.a., straight line
Equipment 20% p.a., straight line
Fixtures and fittings 50% p.a., straight line
Motor vehicles 25% p.a., reducing balance
Residual values are reviewed annually and updated if appropriate. The carrying
value is reviewed for impairment in the period if events or changes in
circumstances indicate the carrying value may not be recoverable. An asset's
carrying value is written down immediately to its recoverable amount if the
asset's carrying amount is greater than its estimated recoverable amount.
Gains and losses on disposals are determined by comparing the proceeds with
the carrying amount and are recognised within 'Administrative expenses' in the
Consolidated Statement of Profit or Loss.
Identifying whether there are indicators of impairment in respect of property,
plant and equipment involves some judgement and a good understanding of the
drivers of value behind the asset. At each reporting period an assessment is
performed in order to determine whether there are any such indicators, which
involves considering the performance at both a contract and business level,
and any significant changes to the markets in which we operate. This is not
considered to be a critical judgement or an area of significant uncertainty.
Freehold Leasehold Plant and Fixtures, Motor Total
property improvements machinery fittings and vehicles £'000
£'000 £'000 £'000 equipment £'000
£'000
Gross carrying amount
At 1 January 2022 1,027 24,395 1,558 29,355 984 57,319
Reclassification - - - (6,087) - (6,087)
Additions 1,635 4,508 - 1,988 - 8,131
Acquired with subsidiary - - - 10 19 29
Disposals - (2) (1,166) (10,386) (488) (12,042)
At 1 January 2023 2,662 28,901 392 14,880 515 47,350
Additions 22,126 682 - 2,893 44 25,745
Disposals - (2,839) (209) (2,375) - (5,423)
At 31 December 2023 24,788 26,744 183 15,398 559 67,672
Depreciation
At 1 January 2022 98 12,129 1,243 22,166 971 36,607
Reclassification - - - (5,426) - (5,426)
Provided in the year 17 3,914 227 3,856 7 8,021
Eliminated on disposals - (2) (1,166) (10,384) (488) (12,040)
At 1 January 2023 115 16,041 304 10,212 490 27,162
Provided in the year 220 5,172 40 1,850 23 7,305
Eliminated on disposals - (2,839) (200) (2,289) - (5,328)
At 31 December 2023 335 18,374 144 9,773 513 29,139
Carrying amount
At 31 December 2023 24,453 8,370 39 5,625 46 38,533
At 31 December 2022 2,547 12,860 88 4,668 25 20,188
15. RIGHT OF USE ASSETS
Accounting policy
Where an asset is subject to a lease, the Group recognises a right of use
asset and a lease liability on the balance sheet. The right of use asset is
measured at cost, which matches the initial measurement of the lease liability
and any costs expected at the end of the lease, and then depreciated on a
straight-line basis over the lease term.
The lease liability is measured at the present value of the future lease
payments discounted using the Group's incremental borrowing rate. Lease
payments include fixed payments, variable payments based on an index and
payments arising from options reasonably certain to be exercised.
The Group has elected to account for short-term leases and leases of low value
assets using the practical expedients. Instead of recognising a right of use
asset and a lease liability, the payments in relation to these are recognised
as an expense in profit or loss on a straight-line basis over the lease term.
In the statement of financial position, right of use assets and lease
liabilities are presented separately.
Critical judgements in applying the Group's accounting policies
The Group holds more than 15,000 leases across its portfolio of residential
properties, offices and vehicles. Whilst the Group endeavours to standardise
the form of leases, operational demands dictate that many leases have specific
wording to address particular operational needs and also to manage the
associated operational and financial risks. As such, each lease requires
individual assessment and the Group is required to make key judgements which
include:
· the identification of a lease;
· assessing the right to direct the use of the underlying asset;
· determining the lease term; and
· an assessment as to the level of future lease payments, including fixed
and variable payments.
The most typical challenges encountered and which form the key judgements are:
· where the lease contains a one-way no-fault break in Mears' favour, the
Group measures the obligation based on the Group's best estimate of its future
intentions;
· where the lessor has a right of substitution meaning that the lessor can
swap one property for another without Mears' approval;
· where Mears does not in practice have the right to control the use of the
asset and the key decision making rights are retained by the supplier;
· where a wider agreement for a supply of services includes a lease
component which meets the definition of a lease under IFRS 16; and
· the assessment of the fixed lease payments where the lease obligation to
the landlord is based on a pass-through arrangement in which Mears only makes
lease payments to the owner to the extent that the property is occupied and to
the extent that rents are received from the tenant.
Key sources of estimation uncertainty
Additions and remeasurements to right of use assets in respect of lease
agreements are equivalent to the present value (or change in present value) of
the relevant lease obligation. Unless there is an interest rate implicit in
the lease itself, the Group's Incremental Borrowing Rate (IBR) is used to
calculate the present value of future lease payments. Estimation is required
in deriving an appropriate IBR. Management believe that the best approximation
for IBR is the currently applicable margin from the grid contained within the
Group's rolling credit facility (RCF) agreement, added to an appropriate base
rate. The Group's RCF is linked to SONIA so that is considered the most
appropriate base rate to use.
The sensitivity of the lease liability to the assumption used in these
estimations is indicated in note 20.
Investment property
Included within right of use assets are certain properties classified as
investment properties in accordance with IAS 40. These properties are leased
primarily in order to earn rentals from sub-leasing. The Group has chosen to
apply the cost model to all investment property and therefore measurement is
in line with IFRS 16 as described above.
Investment property Assets that are used directly within the business Total
£'000
Residential Residential Offices Motor
property property £'000 vehicles
£'000 £'000 £'000
Gross carrying amount
At 1 January 2022 141,134 103,466 11,428 31,040 287,068
Additions* 5,631 38,441 608 8,008 52,688
Disposals (3,019) (5,921) (1,529) (1,491) (11,960)
At 1 January 2023 143,746 135,986 10,507 37,557 327,796
Additions* 8,816 59,148 869 10,073 78,906
Disposals (998) (4,877) (992) (2,956) (9,823)
At 31 December 2023 151,564 190,257 10,384 44,674 396,879
Depreciation
At 1 January 2022 26,203 40,406 5,399 10,111 82,119
Provided in the year 9,043 25,422 1,799 7,222 43,486
Eliminated on disposals (2,901) (5,516) (1,529) (1,295) (11,241)
At 1 January 2023 32,345 60,312 5,669 16,038 114,364
Provided in the year 8,747 32,183 1,710 8,268 50,908
Impairments 6,223 - - - 6,223
Eliminated on disposals (930) (3,960) (992) (2,383) (8,265)
At 31 December 2023 46,385 88,535 6,387 21,923 163,230
Carrying amount
At 31 December 2023 105,179 101,722 3,997 22,751 233,649
At 31 December 2022 111,401 75,674 4,838 21,519 213,432
* Additions includes both new underlying assets and remeasurement of
the right of use asset for changes in the lease terms.
The Group previously sub-divided assets that are sub-leased to customers
between investment property and other residential property. Having reviewed
the details of other residential properties, management considers that all
sub-leased properties meet the definition of investment property.
Investment property included above represents properties held by the Group
primarily to earn rentals, rather than for use in the Group's other
activities. The amount included in lease income in note 2 in respect of these
properties is £26.5m (2022: £28.9m). Direct operating expenses of £24.0m
(2022: £25.8m), excluding impairments, arose from investment property that
generated rental income during the period. The carrying value of the right of
use asset in respect of investment property is considered to be approximately
equal to its fair value.
Impairment
In respect of its investment property, the Group has seen a deterioration in
trading, predominantly as a result of increased regulation together with
above-inflation maintenance and service cost increases. The poor financial
performance combined with increasing interest rates were recognised by
management as an indicator of impairment on certain portfolios of investment
property assets.
In carrying out impairment assessments, management prepared detailed cash flow
forecasts for the life of the underlying leases on these properties and
discounted them using an appropriate rate, in order to estimate the value in
use.
In many cases, the Group's customer contract associated with these portfolios
benefits from Nominations Agreements with Local Authorities, which contain
income protection clauses. The discount rate for each portfolio of properties
was therefore set by reference to publicly available market yield information,
adjusted for the relative risk associated with each scheme, taking account of
any income protections, as well as other risk factors such as maintenance
responsibilities. This resulted in a range of discount rates being applied,
from 6.6% to 7.5%.
As a result of management's impairment review, several portfolios were
identified where the value in use was lower than the carrying amount of the
right of use asset. As such, an impairment has been applied to those
properties as detailed in the table above. The impact of the impairment on the
Statement of profit or loss has been recognised within cost of sales.
Included within the impairment above were two individually significant
properties. The first is due to run until 2041 and its future cash flow
forecast was discounted at 6.6%, resulting in an impairment of £3.3m. The
second is due to continue until 2038 and its future cash flow forecast was
discounted at 7.2%, resulting in an impairment of £1.8m. All other
impairments in aggregate totalled £1.1m.
If all discount rates used had been 0.5 percentage points lower, the overall
impairment would have been £0.8m lower. If annual net cash inflows were 10%
(or £0.3m) higher across all properties, the impairment would have been
£2.3m lower.
16. INVESTMENTS
Accounting policy
Investments include those over which the Group has significant influence but
which it does not control. These are categorised as associates. It is
presumed that the Group has significant influence where it has between 20% and
50% of the voting rights in the investee unless indicated otherwise. The Group
also holds investments in joint ventures where the Group and other parties
have joint control over their activities.
The basis by which associates and joint ventures are consolidated in the
preliminary results is through the equity method, as outlined in the basis of
consolidation.
In addition to associates and joint ventures, the Group holds investments in
entities over which it does not exert significant influence. These are
accounted for at fair value through profit or loss.
Associates Other investments Total
£'000 £'000 £'000
At 1 January 2022 648 65 713
Share of profit 858 - 858
Distributions received (300) - (300)
At 1 January 2023 1,206 65 1,271
Share of profit 486 - 486
Distributions received (1,135) - (1,135)
At 31 December 2023 557 65 622
Other investments represents the Group's 6.16% holding in Mason Topco Limited,
which is mandatorily held at fair value through profit or loss. There have
been no changes in the fair value of the investment during the year (2022:
none).
Associates
Set out below is the investment in an associate as at 31 December 2023, which
in management's opinion is significant to the Group:
Nature of Proportion Country of Carrying value
relationship held registration
2023 2022
£'000 £'000
Pyramid Plus South LLP Associate 30% England and Wales 557 1,206
Pyramid Plus South LLP is a repairs and maintenance service provider that is
central to one of the Group's contracts. The Group's client for the contract
holds the remaining 70% interest in the entity.
During the year, the Group received distributions of £1.1m (2022: £0.3m)
from Pyramid Plus South LLP. Summarised financial information for Pyramid Plus
South LLP for the year is shown below:
2023 2022
£'000 £'000
Revenue and profits
Revenue 24,802 21,600
Expenses (23,183) (18,738)
Profit for the year 1,619 2,862
Other comprehensive income - -
Total comprehensive income 1,619 2,862
Share of profit at 30% 486 858
Net assets
Non-current assets - -
Current assets 7,497 7,795
Current liabilities (4,666) (3,763)
Non-current liabilities - -
Total assets less total liabilities 2,831 4,032
Cash and cash equivalents of £1.9m (2022: £2.5m) were included in current
assets above.
17. INVENTORIES
Accounting policy
Inventories are stated at the lower of cost and net realisable value. Cost is
the actual purchase price of materials.
Work in progress is included in inventories after deducting any foreseeable
losses and payments on account not matched with revenue. Work in progress
represents costs incurred on new build residential construction projects where
the eventual sale will be of the completed property. Work in progress is
stated at the lower of cost and net realisable value. Cost comprises
materials, direct labour and any subcontracted work that has been incurred in
bringing the inventories and work in progress to their present location and
condition.
2023 2022
£'000 £'000
Materials and consumables 1,463 1,329
Work in progress - 5,550
1,463 6,879
The Group consumed inventories totalling £86.3m during the year (2022:
£93.9m). No items are being carried at fair value less costs to sell (2022:
£nil).
18. TRADE AND OTHER RECEIVABLES
Accounting policy
Trade receivables represent amounts due from customers in respect of invoices
raised. They are initially measured at their transaction price and
subsequently remeasured at amortised cost.
Retention assets represent amounts held by customers for a period following
payment of invoices, to cover any potential defects in the work. Retention
assets are included in trade receivables and are therefore initially measured
at their transaction price.
Contract assets represent revenue recognised in excess of the total of
payments on account and amounts invoiced.
Critical judgements and key sources of estimation uncertainty
The estimation techniques used for revenue in respect of contracting require
judgements to be made about the stage of completion of certain contracts and
the recovery of contract assets. Each contract is treated on its merits and
subject to a regular review of the revenue and costs to complete that
contract. Contract assets represent revenue recognised in excess of the total
of payments on account and amounts invoiced.
However, due to the estimation uncertainty across numerous contracts each with
different characteristics, it is not practical to provide a quantitative
analysis of the aggregated judgements that are applied, and management does
not believe that disclosing a potential range of outcomes on a consolidated
basis would provide meaningful information to a reader of the accounts.
2023 2022
£'000 £'000
Current assets
Trade receivables 23,230 21,483
Contract assets 79,703 84,797
Contract fulfilment costs 768 1,283
Prepayments and accrued income 18,929 13,257
Other debtors 4,060 7,514
Total trade and other receivables 126,690 128,334
Included in trade receivables is £3.4m (2022: £4.3m) in respect of retention
payments due in more than one year.
Trade receivables are normally due within 30 to 60 days and do not bear any
effective interest rate. All trade receivables and accrued income are subject
to credit risk exposure.
The maximum exposure to credit risk in relation to trade receivables and
accrued income at the balance sheet date is the fair value of trade
receivables and accrued income. The Group's customers are primarily a mix of
Local and Central Government and Housing Associations where credit risk is
minimal. The Group's customer base is large and unrelated and, accordingly,
the Group does not have a significant concentration of credit risk with any
one counterparty.
The amounts presented in the balance sheet in relation to the Group's trade
receivables and accrued income balances are presented net of loss allowances.
The Group measures loss allowances at an amount equal to lifetime expected
credit losses using both quantitative and qualitative information and analysis
based on the Group's historical experience, and forward-looking information.
The ageing analysis of trade receivables is as follows:
2023 2022
Gross Expected Carrying Gross Expected Carrying
amount due credit loss value amount due credit loss value
£'000 £'000 £'000 £'000 £'000 £'000
Not past due 20,110 (158) 19,952 18,661 (986) 17,675
Less than three months past due 2,168 (627) 1,541 3,051 (504) 2,547
More than three months past due 2,674 (937) 1,737 1,946 (685) 1,261
Total trade receivables 24,952 (1,722) 23,230 23,658 (2,175) 21,483
For expected credit losses with large organisations, such as Government bodies
or Housing Associations, expected credit losses are calculated on an
individual basis, taking account of all the relevant factors applicable to the
amount outstanding. The Group has no history of defaults with these types of
customers, so expected credit losses relate to specific disputed balances.
For individual tenant customers, expected credit losses are calculated based
on the Group's historical experience of default by applying a percentage based
on the age of the customer's balance.
The movement in expected credit loss during the year is shown below:
2023 2022
£'000 £'000
At 1 January 2,175 7,006
Changes in amounts provided 1,482 1,208
Amounts utilised (1,935) (6,039)
At 31 December 1,722 2,175
The movement in contract assets during the year is shown below:
2023 2022
£'000 £'000
At 1 January 84,797 97,680
Recognised on completion of performance obligations 1,050,778 906,415
Invoiced during the year (1,055,872) (919,298)
At 31 December 79,703 84,797
Included in other debtors is an amount of £2.3m (2022: £2.9m) recoverable
from the Group's fronting insurers. The Group manages its insurance risk
through a captive insurance company. Whilst the Group is effectively paying a
premium to itself, the premium passes through a third party fronting insurer,
which results in a matching other debtor and other creditor.
19. TRADE AND OTHER PAYABLES
2023 2022
£'000 £'000
Trade payables 58,651 55,854
Accruals 72,147 60,278
Social security and other taxes 22,203 26,343
Contract liabilities 28,491 23,672
Other creditors 5,543 4,866
187,035 171,013
Due to the short duration of trade payables, management considers the carrying
amounts recognised in the Consolidated Balance Sheet to be a reasonable
approximation of their fair value.
The movement in contract liabilities during the year is shown below:
2023 2022
£'000 £'000
At 1 January 23,672 27,843
Revenue recognised in respect of contract liabilities (12,015) (24,296)
Payments received in advance of performance obligations being completed 16,834 20,125
At 31 December 28,491 23,672
Contract liabilities relate to payments received from the customer on the
contract, and/or amounts invoiced to the customer in advance of the Group
performing its obligations on contracts where revenue is recognised either
over time or at a point in time. These amounts are expected to be recognised
within revenue within one year of the balance sheet date.
Included in other creditors is an amount of £2.3m (2022: £2.9m) payable to
the Group's fronting insurers as described in note 18.
20. LEASE LIABILITIES
Lease liabilities are separately presented on the face of the Consolidated
Statement of Financial Position as shown below:
2023 2022
£'000 £'000
Current 54,492 44,376
Non-current 199,948 181,045
254,440 225,421
The Group had not committed to any leases which had not commenced at 31
December 2023. The majority of the Group's property leases contain variable
lease payments that vary annually either by reference to an index, such as the
Consumer Prices Index (CPI), or based on market conditions each year. The
potential impact of this variation depends on future events and therefore
cannot be quantified, but the Group would typically expect commensurate
adjustments to income derived from these properties.
A smaller number of property leases contain termination or extension options.
Management has assessed whether it is reasonably certain that the extension or
termination options will be exercised, which is then reflected in the
valuation.. In some cases, a portfolio of leases with similar lease terms is
considered together and, where a rolling notice period is available to the
Group, an average expected lease life may be applied.
The Group has elected not to recognise a lease liability for short-term leases
and leases of low value. Payments made under such leases are expensed on a
straight-line basis. Certain leases incorporate variable lease payments that
are not included in the measurement of lease liabilities in accordance with
IFRS 16. The expense relating to payments not included in the measurement of
the lease liability is as follows:
2023 2022
£'000 £'000
Short-term leases 57,281 46,683
Low value leases 948 1,096
Variable lease payments 979 1,236
The portfolio of short-term leases to which the Group is committed at the end
of the reporting period is not dissimilar to the portfolio to which the above
disclosure relates.
Other disclosures relating to lease liabilities are provided in the table
below:
Note 2023 2022
£'000 £'000
Depreciation of right of use assets during the year 15 50,908 43,486
Impairment of right of use assets during the year 15 6,223 -
Additions to right of use assets during the year 15 78,906 52,688
Carrying value of right of use assets at the year end 15 233,649 213,432
Interest on lease liabilities during the year 5 9,899 7,617
Total cash outflow in respect of leases during the year 25 58,048 50,827
The Group's lease liabilities are subject to changes in certain key
assumptions in estimating the IBRs used to calculate the liabilities. The IBRs
used during the year ranged from 5.54% to 7.47%. The impact of an increase in
all IBRs applied during 2023 by 0.5 percentage points would be a £0.5m
reduction in the lease liability and a £0.1m reduction in profit before tax.
21. PROVISIONS
Critical judgements and key sources of estimation uncertainty
By definition, provisions require estimates to be made of future outcomes and
the eventual outflow may differ significantly from the amount recognised at
the end of the year. Management have estimated provisions based on all
relevant information available to them. For individually material provisions
further information has been provided on the maximum likely outflow, in
addition to the best estimate.
The carrying value of each class of provisions is shown below:
2023 2022
Current Non-current Total Current Non-current Total
£'000 £'000 £'000 £'000 £'000 £'000
Onerous contract provisions 1,898 6,886 8,784 - - -
Property provisions 520 761 1,281 475 360 835
Insurance provisions 2,623 1,388 4,011 2,305 805 3,110
Legal and other provisions 3,365 750 4,115 6,000 1,945 7,945
Total provisions 8,406 9,785 18,191 8,780 3,110 11,890
A summary of the movement in provisions during the year is shown below:
Onerous contract provisions Property provisions £'000 Insurance provisions £'000 Legal and other provisions Total
£'000 £'000 £'000
At 1 January 2023 - 835 3,110 7,945 11,890
Provided during the year 8,784 491 2,227 3,020 14,522
Utilised during the year - - (1,326) (6,850) (8,176)
Unused amounts reversed - (45) - - (45)
At 31 December 2023 8,784 1,281 4,011 4,115 18,191
Onerous contract provisions
During the year, the Group has identified a small number of contracts, with
remaining terms ranging from less than 1 year to 33 years, under which the
unavoidable costs of meeting the obligations under the contract exceed the
economic benefit expected to be received under it. These unavoidable costs are
the lower of the cost of fulfilling the contract and any compensation or
penalties of exiting from the contract.
The largest single component within onerous contract provisions is £4.2m
relating to a single Community Housing contract which is reported within the
Management segment. The remaining balance of £4.6m is attached to the
Maintenance segment.
In identifying the excess of costs over expected economic benefits, the Group
has prepared cash flow forecasts for the lifetime of each contract, based on
management's best estimates. For contracts where the time value of money is
material, these cash flow forecasts have then been discounted using an
appropriate discount rate. The forecasts have modelled real cash flows and as
such, a real discount rate has been applied.
Recognising that by their nature there is variability in future-looking cash
flow forecasts, an appropriate risk factor has been applied when selecting the
discount rates, resulting in rates that are lower than the real risk-free
rate. The range of discount rates used is between 0.3% and 1.5%, depending on
the relative uncertainty of the cash flows.
If the discount rates used were 0.5 percentage points higher in each case, the
onerous contract provision would have been £0.3m lower.
The provisions recognised are also sensitive to the underlying cash flow
forecasts. If the anticipated annual net cash outflow, ranging from £0.2m to
£1.3m across the different contracts and forecast years, was 10% lower, the
onerous contract provision would have been £0.9m lower.
Property provisions
Property provisions represent the expected costs of reinstating several office
properties to their original condition upon termination of the lease.
Insurance provisions
The Group self-insures certain fleet and liability risks. Provisions for
claims are recognised in respect of both claims received but not concluded,
which are expected to be settled within one year, and claims incurred but not
received, which are treated as non-current. The value of these provisions is
estimated based on past experience of claims.
Legal and other provisions
Legal and other provisions primarily relate to previously completed customer
contracts where management is aware of probable liabilities and future losses
associated with work defects. This also includes other supply chain claims.
The opening provision at 1 January 2023 included one abnormally large claim
where a former customer asserted that the Group had acted in breach of
contract, the Group having previously served a notice of termination. The
matter had been referred to adjudication with a total claim value of £9.3m,
against which management, having considered a range of possible outcomes, had
provided a sum of £5.7m, which was believed to represent the best estimate of
the likely outcome. The matter concluded with a final loss of £6.6m plus
interest.
The closing provision includes one customer related defects claim which is the
subject of active litigation, against which management has provided £1.6m
(2022: £1.5m) (against a total claim value of £6.9m). Management has
received external technical support and believes this provision represents the
best estimate of the likely outcome. A separate supply chain claim relating to
the value of works delivered is the subject of litigation, against which
management has provided £0.5m (2022: £0.5m) against a claim value of £5.1m,
much of which is considered to be without merit and liability denied.
The remaining claims account for a provision of £2.0m, but the range of
possible outcomes is narrow and any risk to the downside is not material.
22. FINANCIAL INSTRUMENTS
Accounting policy
The Group uses a limited number of financial instruments comprising cash and
liquid resources, borrowings and various items such as trade receivables and
trade payables that arise directly from its operations. The main purpose of
these financial instruments is to finance the Group's operations. The Group
seeks to finance its operations through a combination of retained earnings and
borrowings and investing surplus cash on deposit. The Group uses financial
instruments to manage the interest rate risks arising from its operations and
sources of finance but has no interests in the trade of financial instruments.
Financial assets and liabilities are recognised in the Consolidated Balance
Sheet when the Group becomes party to the contractual provisions of the
instrument. The principal financial assets and liabilities of the Group are as
follows:
Financial assets
Investments in unlisted equities that do not convey control or significant
influence over the underlying entity are recognised at fair value. They are
subsequently remeasured at fair value with any changes being recognised in the
Consolidated Statement of Profit or Loss.
Contingent consideration is held by the Group in order to collect the
associated cash flows but until the amount is determined, these are not solely
payments of principal and interest and therefore these assets are measured
both initially and subsequently at fair value, with any changes being
recognised in the Consolidated Statement of Profit or Loss.
Loan notes and other non-current debtors are held by the Group in order to
collect the associated cash flows and not for trading. They are therefore
initially recognised at fair value and subsequently measured at amortised
cost, less any provision for impairment.
Financial assets generated from goods or services transferred to customers are
presented as either trade receivables or contract assets. All of the Group's
trade receivables are short-term in nature, with payments typically due within
60 days of the works being performed. The Group's contracts with its customers
therefore contain no significant financing component.
Mears recognises a loss allowance for expected credit losses on financial
assets subsequently measured at amortised cost using the 'simplified
approach'. Individually significant balances are reviewed separately for
impairment based on the credit terms agreed with the customer. Other balances
are grouped into credit risk categories and reviewed in aggregate.
Trade receivables and cash at bank and in hand are non-derivative financial
assets with fixed or determinable payments that are not quoted in an active
market. Trade receivables are initially recorded at fair value net of
transaction costs, being invoiced value less any provisional estimate for
impairment should this be necessary due to a loss event. Trade receivables are
subsequently remeasured at invoiced value, less an updated provision for
impairment. Any change in their value through impairment or reversal of
impairment is recognised in the Consolidated Statement of Profit or Loss.
Cash and cash equivalents include cash at bank and in hand and bank deposits
available at short notice that are subject to an insignificant risk of changes
in value. Bank overdrafts are presented as current liabilities in the
Consolidated Balance Sheet but are included within cash and cash equivalents
within the Statement of Cash Flows, as they are used as part of the Group's
cash management process and regularly repaid. The Group also considers its
revolving credit facility to be an integral part of its cash management,
although this facility has not been utilised during 2022 or 2023.
Following initial recognition, financial assets are subsequently remeasured at
amortised cost using the effective interest rate method.
Financial liabilities
The Group's financial liabilities are trade payables, lease liabilities,
deferred and contingent consideration and other creditors. They are included
in the Consolidated Balance Sheet line items 'Trade and other payables',
'Lease liabilities' and 'Other non-current liabilities'.
Bank and other borrowings are initially recognised at fair value net of
transaction costs. Gains and losses arising on the repurchase, settlement or
cancellation of liabilities are recognised respectively in 'Finance income'
and 'Finance costs'. Borrowing costs are recognised as an expense in the
period in which they are incurred with the exception of those which are
directly attributable to the construction of a qualifying asset, which are
capitalised as part of that asset.
Trade payables on normal terms are not interest bearing and are stated at
their fair value on initial recognition and subsequently at amortised cost.
Critical judgements
Included within financial liabilities is a credit facility arising from banking arrangements to provide supplier financing. Judgement has been required to determine whether the cash flows arising from this facility are financing or operating in nature, and whether the cash flows from the financial institution are deemed to be cash flows of the Group. Management has determined that this facility is financing in nature, as it allows suppliers to receive cash earlier than they would under our normal payment cycle, and that the cash flows of the financial institution related to these transactions are, in substance, cash flows of the Group and should be reflected in the cash flow statement of the Group (see other credit facilities in note 25).
2023 2022
£'000 £'000
Non-current assets
Fair value (level 3)
Investments - other investments 65 65
Amortised cost
Loan notes and other non-current debtors 4,458 4,073
Current assets
Amortised cost
Trade receivables 23,230 21,483
Other debtors 4,060 7,514
Short-term financial assets 7,090 1,963
Cash at bank and in hand 138,756 98,138
173,136 129,098
Non-current liabilities
Fair value (level 3)
Contingent consideration - (438)
Amortised cost
Lease liabilities (199,948) (181,045)
Deferred consideration - (244)
(199,948) (181,289)
Current liabilities
Fair value (level 3)
Contingent consideration (581) -
Amortised cost
Overdrafts and other short-term borrowings (36,699) -
Trade payables (58,651) (55,854)
Lease liabilities (54,492) (44,376)
Other creditors (4,710) (4,614)
Deferred consideration (252) (252)
(154,804) (105,096)
(177,674) (153,587)
The amount recognised as an allowance for expected credit losses on trade
receivables during 2023 was £1.5m (2022: £1.2m).
The IFRS 13 hierarchy level categorisation relates to the extent the fair
value can be determined by reference to comparable market values. The
classifications range from level 1, where instruments are quoted on an active
market, through to level 3, where the assumptions used to arrive at fair
value do not have comparable market data.
The fair values of investments in unlisted equity instruments are determined
by reference to an assessment of the fair value of the entity to which they
relate. This is typically based on a multiple of earnings of the underlying
business.
There have been no transfers between levels during the year.
Fair value information
The fair value of the Group's financial assets and liabilities approximates to
the book value as disclosed above.
Financial risk management
The Group's activities expose it to a variety of financial risks: market risk
(including interest rate risk and price risk); credit risk; and liquidity
risk. The main risks faced by the Group relate to the availability of funds to
meet business needs and the risk of credit default by customers. The Group's
overall risk management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the Group's
financial performance.
Risk management is carried out under policies and guidelines approved by the
Board of Directors.
Borrowing facilities
The Group's borrowing facilities are drawn on as required to manage its cash
needs. Banking facilities are reviewed regularly and extended and replaced in
advance of their expiry.
The Group had a revolving credit facility of £70.0m with Barclays Bank PLC,
HSBC Bank PLC and Citi. In order to assist with short term day-to-day treasury
requirements, this facility includes an overdraft carve out with Barclays Bank
PLC of £10m, which was temporarily increased to £22.3m at the year end,
leaving £47.7m available to draw on the revolving credit facility.
The Group pays a margin over and above SONIA on bank borrowings when it uses
its facility. The margin is based on the ratio of Group consolidated net
borrowings to Group consolidated adjusted EBITDA and could have varied between
1.75% and 2.75% during the year.
Details of the Group's banking covenants are provided within the Annual
Report.
Overdrafts and other short-term borrowings
At 31 December 2023, the Group had overdrafts of £25.5m (2022: £nil) and
other credit facilities of £11.2m (2022: £nil). Overdrafts were utilised
alongside highly liquid cash equivalents, such as money market facilities, for
the purposes of cash management during the year. For the purpose of the
Consolidated Cash Flow Statement overdraft facilities have been included
within cash and cash equivalents.
Other credit facilities are short-term borrowings due within no more than 60
days and are also used as part of the Group's cash management process.
The entire balance of overdrafts and other short-term borrowings was repaid in
full on 2 January 2024.
Interest rate risk management
The Group finances its operations through a mixture of retained profits and
bank borrowings from major banking institutions at floating rates of interest
based on SONIA.
The Group's policy is to accept a degree of interest rate risk, provided the
effects of the various potential changes in rates remain within
certain prescribed parameters.
At 31 December 2023, the Group had minimal exposure to interest rate risk
relating to borrowing costs.
Liquidity risk management
The Group seeks to manage liquidity risk by ensuring sufficient liquidity is
available to meet foreseeable needs and to invest cash assets safely and
profitably.
Management monitors rolling forecasts of the Group's liquidity reserve
(comprising undrawn borrowing facilities and cash and cash equivalents) on the
basis of expected cash flows. This is carried out centrally for the Group as a
whole in accordance with internal practice and limits.
The quantum of committed borrowing facilities of the Group is regularly
reviewed and is designed to exceed forecast peak gross debt levels. For
short-term working capital purposes, the Group utilises bank overdrafts as
required. These facilities are regularly reviewed and are renegotiated ahead
of their expiry date.
The table below shows the undiscounted maturity profile of the Group's
financial liabilities:
Within 1 year 1-2 years 2-5 years Over 5 years Total
£'000 £'000 £'000 £'000 £'000
2023
Non-derivative financial liabilities
Overdrafts and other short-term borrowings 36,699 - - - 36,699
Trade payables 58,651 - - - 58,651
Lease liabilities 58,492 44,707 88,428 114,418 306,045
Other creditors 4,710 - - - 4,710
Deferred and contingent consideration 833 - - - 833
2022
Non-derivative financial liabilities
Trade payables 55,854 - - - 55,854
Lease liabilities 47,320 37,821 68,502 116,218 269,861
Other creditors 4,614 - - - 4,614
Deferred and contingent consideration 260 860 - - 1,120
Credit risk management
The Group's credit risk is primarily attributable to its trade receivables,
contract assets and work in progress.
Trade receivables are normally due within 30 to 60 days. Trade and other
receivables included in the Consolidated Balance Sheet are stated net of an
expected credit loss provision which has been estimated by management
following a review of individual receivable accounts. There is no Group-wide
rate of provision and provision made for debts that are overdue is based on
prior default experience and known factors at the balance sheet date.
Receivables are written off against the expected credit loss provision when
management considers that the debt is no longer recoverable.
Housing customers are typically Local and Central Government and Housing
Associations. The nature of these customers means that credit risk is minimal.
Other trade receivables contain no specific concentration of credit risk as
the amounts recognised represent a large number of receivables from various
customers.
The Group continually monitors the position of major customers and
incorporates this information into its credit risk controls. External credit
ratings are obtained where appropriate.
Details of the ageing of trade receivables are shown in note 18.
Loan notes receivable
The loan notes included within non-current assets were received as part of the
disposal of the Terraquest Group. They are repayable in December 2028 and
accrue interest at 10% per annum. Their carrying value including accumulated
interest at 31 December 2023 was £4.2m (2022: £3.8m).
Short-term financial assets
Short-term financial assets are fixed-term deposits with financial
institutions held for investment purposes rather than for cash management. All
short-term financial assets have a maturity at inception of 12 months or less
and are held for the purpose of generating returns.
Contingent consideration receivable
The table below shows the movements in contingent consideration receivable:
£'000
At 1 January 2022 6,531
Movement in fair value of contingent consideration 802
Received during the year (7,333)
At 1 January 2023 and 31 December 2023 -
Deferred and contingent consideration payable
The table below shows the movements in deferred and contingent consideration
payable:
Deferred Contingent Total
£'000 £'000 £'000
At 1 January 2022 - - -
Fair value of deferred and contingent consideration on acquisition of IRT 496 438 934
Surveys Limited
At 1 January 2023 496 438 934
Unwinding of discount on deferred consideration 16 - 16
Movement in fair value of contingent consideration - 143 143
Paid during the year (260) - (260)
At 31 December 2023 252 581 833
Deferred consideration payable is initially measured at fair value by
discounting the contractual amount due using a discount rate based on the
assessed cost of debt for the Group. It is subsequently measured at amortised
cost.
Contingent consideration payable is measured at fair value based on
management's expectation of the amount that will be payable. This figure is
then discounted at an appropriate rate. The value of contingent consideration
could vary by up to £0.6m based on the number of active properties being
managed by software developed by the acquired business at the second
anniversary of acquisition.
Capital management
The Group's objectives when managing capital are:
· to safeguard the Group's ability to continue as a going concern, so that
it can continue to provide returns for shareholders and benefits for other
stakeholders;
· to provide an adequate return to shareholders by pricing products and
services commensurately with the level of risk; and
· to maintain an optimal capital structure to reduce the cost of capital.
The Group sets the amount of capital in proportion to risk. The Group manages
the capital structure and makes adjustments to it in light of changes in
economic conditions and the risk characteristics of the underlying assets. In
order to maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return capital to shareholders,
issue new shares or sell assets to reduce debt.
23. DEFERRED TAXATION
Deferred tax is calculated on temporary differences under the liability
method.
Deferred tax relates to the following:
Consolidated Consolidated Statement of Profit or Loss Other movements
Balance Sheet
At 31 December 2023 At 31 December 2022 2023 2022 2023 2022
£'000 £'000 £'000 £'000 £'000 £'000
Pension schemes (4,799) (5,800) (481) 66 1,482 2,449
Share-based payments 698 704 118 (26) (124) 142
Tax losses - - - (249) - -
Provisions - - - (149) - -
Acquisition intangibles (540) (601) 61 61 - -
Capital allowances 1,295 317 978 (330) - -
Leases 569 625 (56) (43) - -
Fair value of software development (128) (143) 15 3 - (146)
(2,905) (4,898) 635 (667) 1,358 2,445
Other movements are recognised in the Consolidated Statement of Comprehensive
Income in respect of pension schemes and in the Consolidated Statement of
Changes in Equity in respect of share-based payments.
In accordance with IFRS 2 'Share-based Payment', the Group has recognised an
expense for the consumption of employee services received as consideration for
share options granted. A tax deduction will not arise until the options are
exercised. The tax deduction in future periods is dependent on the Company's
share price at the date of exercise. The estimated future tax deduction is
based on the options' intrinsic value at the balance sheet date.
The cumulative amount credited to the Consolidated Statement of Profit or Loss
is limited to the tax effect of the associated cumulative share-based payment
expense. The excess has been credited directly to equity. This is presented in
the Consolidated Statement of Comprehensive Income.
In addition to those recognised, unused tax losses totalling £1.4m (2022:
£25.5m) have not been recognised as management does not consider that it is
probable that they will be recovered.
Intangible assets acquired as part of a business combination are capitalised
at fair value at the date of the acquisition and amortised over their useful
economic lives. The UK tax regime calculates tax using the individual
financial statements of the members of the Group and not the consolidated
accounts. Hence, the tax base of acquisition intangible assets arising on
consolidation is £nil. Furthermore, no UK tax relief is available on the
majority of acquisition intangibles within individual entities, so the tax
base of these assets is also £nil. The estimated tax effect of this £nil tax
base is accounted for as a deferred tax liability which is released over the
period of amortisation of the associated acquisition intangible asset.
24. SHARE CAPITAL AND RESERVES
Classes of reserves
Share capital represents the nominal value of shares that have been issued.
Share premium represents the difference between the nominal value of shares
issued and the total consideration received.
Treasury shares are equity instruments of the Group that are reacquired. They
are recognised at cost and deducted from equity as a separate reserve.
The share-based payment reserve represents employee remuneration which is
credited to the share-based payment reserve until the related share options
are exercised. Upon exercise the share-based payment reserve is transferred to
retained earnings.
The merger reserve relates to the difference between the nominal value and
total consideration in respect of acquisitions, where the Company was entitled
to the merger relief offered by the Companies Act 2006.
Share capital
2023 2022
£'000 £'000
Allotted, called up and fully paid
At 1 January: 111,000,889 (2022: 110,926,510) ordinary shares of 1p each 1,110 1,109
Issue of 2,713,031 (2022: 74,379) shares on exercise of share options 27 1
Cancellation of 12,162,838 (2022: nil) shares following share buybacks (121) -
At 31 December: 101,551,082 (2022: 111,000,889) ordinary shares of 1p each 1,016 1,110
During the year 2,713,031 (2022: 74,379) ordinary 1p shares were issued in
respect of share options exercised. In addition, 12,162,838 (2022: nil) shares
were repurchased by the Group and cancelled.
Share premium
£'000
At 1 January 2022 82,265
Issue of shares on exercise of share options 86
At 1 January 2023 82,351
Issue of shares on exercise of share options 2,530
Capital reduction (82,549)
At 31 December 2023 2,332
On 11 October 2023, following approval by the High Court, the Group cancelled
the entire amount of its share premium account, resulting in an increase in
distributable reserves of £82.5m. The balance at 31 December 2023 reflects
the excess of the exercise price over the nominal value of shares issued after
11 October 2023.
Treasury shares
Thousands £'000
At 1 January 2022 and 1 January 2023 - -
Acquired by the EBT 1,891 5,122
At 31 December 2023 1,891 5,122
25. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
The following non-operating cash flow adjustments have been made to the result
for the year before tax:
2023 2022
£'000 £'000
Depreciation 58,213 51,508
Impairment of right of use assets 6,223 -
Profit on disposal of assets (101) (224)
Amortisation 1,879 2,299
Share-based payments 1,040 599
IAS 19 pension movement (758) 859
Share of profits of associates (486) (858)
Finance income (5,939) (2,033)
Finance cost 11,182 8,374
Total 71,253 60,524
Movements in financing liabilities during the year are as follows:
Revolving Other credit facilities Lease Total
£'000
credit facility liabilities £'000
£'000 £'000
At 1 January 2022 - - 216,890 216,890
Inception of new leases* - - 52,688 52,688
Termination of leases - - (947) (947)
Interest 424 - 7,617 8,041
Arrangement fees 201 - - 201
Cash outflows including in respect of capital and interest (625) - (50,827) (51,452)
At 1 January 2023 - - 225,421 225,421
Inception of new leases* - - 78,907 78,907
Termination of leases - - (1,739) (1,739)
Increase in facility - 11,244 - 11,244
Interest 502 - 9,899 10,401
Arrangement fees 38 - - 38
Cash outflows including in respect of capital and interest (540) - (58,048) (58,588)
At 31 December 2023 - 11,244 254,440 265,684
* Including modifications to existing leases resulting in a change in
lease liabilities.
Cash outflows in respect of lease liabilities include £9.9m (2022: £7.6m) in
respect of interest paid and £48.1m (2022: £43.2m) in respect of discharge
of the underlying lease liabilities.
Other credit facilities are banking facilities that allow suppliers to receive
cash from the financial institution at a date earlier than our normal payment
cycle. The increase in the facility is a net movement over the year (see note
22, critical judgements).
For the purpose of the Consolidated Cash Flow Statement, cash and cash
equivalents comprise the following at 31 December:
2023 2022
£'000 £'000
Bank and cash 2,755 98,138
Readily available deposits 136,000 -
138,755 98,138
Bank overdrafts (25,454) -
Cash and cash equivalents 113,301 98,138
26. PENSIONS
Accounting policy
Retirement benefit obligations
The Group operates both defined benefit and defined contribution pension
schemes as follows:
Defined contribution pensions
A defined contribution plan is a pension plan under which the Group pays fixed
contributions to an independent entity. The Group has no legal obligations to
pay further contributions after payment of the fixed contribution.
The contributions recognised in respect of defined contribution plans are
expensed as they fall due. Liabilities and assets may be recognised if
underpayment or prepayment has occurred and are included in current
liabilities or current assets as they are normally of a short-term nature.
The assets of the schemes are held separately from those of the Group in an
independently administered fund.
Defined benefit pensions
The Group contributes to defined benefit schemes which require contributions
to be made to separately administered funds.
A defined benefit plan is a pension plan that defines an amount of pension
benefit that an employee will receive on retirement, usually dependent on one
or more factors such as age, years of service and salary. The legal
obligations for any benefits from this kind of pension plan remain with the
Group, even if plan assets for funding the defined benefit plan have been set
aside.
Scheme liabilities are measured using the projected unit funding method,
applying the principal actuarial assumptions at the balance sheet date. Assets
are measured at market value. In accordance with IFRIC 14, the asset that is
recognised is restricted to the amount by which the IAS 19 service cost is
expected, over the lifetime of the scheme, to exceed funding contributions
payable in respect of accruing benefits, or to the amount of any unconditional
right to a refund, if greater..
Where the Group has a contractual obligation to make good any deficit in its
share of a Local Government Pension Scheme (LGPS) but also has the right to
recover the costs of making good any deficit from the Group's client, the fair
value of that guarantee asset has been recognised and disclosed. Movements in
the guarantee asset are taken to the Consolidated Statement of Profit or Loss
and to the Consolidated Statement of Comprehensive Income to match the
movement in pension assets and liabilities.
The Group recognises the pension liability and guarantee assets separately on
the face of the Consolidated Balance Sheet.
Actuarial gains and losses are taken to the Consolidated Statement of
Comprehensive Income as incurred. For this purpose, actuarial gains and losses
comprise both the effects of changes in actuarial assumptions and experience
adjustments arising because of differences between the previous actuarial
assumptions and what has actually occurred.
Other movements in the net surplus or deficit are recognised in the
Consolidated Statement of Profit or Loss, including the current service cost,
any past service cost and the effect of curtailments or settlements. The net
interest cost is also charged to the Consolidated Statement of Profit or Loss.
The amount charged to the Consolidated Statement of Profit or Loss in respect
of these plans is included within operating costs.
When the Group ceases its participation in a defined benefit pension scheme,
the difference between the carrying value of the scheme as calculated on an
IAS 19 basis and any deficit payment or surplus receipt due are recognised in
the Consolidated Statement of Profit or Loss as a settlement.
The Group's contributions to the scheme are paid in accordance with the rules
of the scheme and the recommendations of the scheme actuary.
Defined benefit assets
Assets for Group schemes are based on the latest asset information provided by
the scheme administrators.
Scheme assets for Other schemes have been estimated by rolling forward the
published asset position from the previous year using market index returns
over the period. This is considered to provide a good estimate of the fair
value of the scheme assets and the values will be updated to actuals each
time a triennial valuation takes place.
Defined benefit liabilities
A number of key estimates have been made, which are given below, and which are
largely dependent on factors outside the control of the Group:
· inflation rates;
· mortality;
· discount rate; and
· salary and pension increases.
Details of the particular estimates used are included in this note.
Sensitivity analysis for these key estimates is included below.
Where the Group has a contractual obligation to make good any deficit in its
share of an LGPS but also has the right to recover the costs of making good
any deficit from the Group's client, the fair value of that asset has been
recognised and disclosed. The right to recover costs is limited to exclude
situations where the Group causes the scheme to incur service costs in excess
of those which would have been incurred were the members employed within Local
Government. Management has made judgements in respect of whether any of the
deficit is as a result of such situations.
The right to recover costs is also limited to situations where any cap on
employer contributions to be suffered by the Group is not set so as to
contribute to reducing the deficit in the scheme. Management, in conjunction
with the scheme actuaries, has made judgements in respect of the predicted
future service cost and contributions to the scheme to reflect this in the
fair value of the asset recognised.
Key sources of estimation uncertainty
The net position on defined benefit pension schemes is a key source of
estimation uncertainty. Given the importance of this area and to
ensure appropriate estimates are made based on the most relevant information
available, management has continued to engage with third party advisers in
assessing each of the underlying assumptions. The discount rate is derived
from the return on corporate bond yields, and whilst this is largely
observable, any change in discount rates in the future could have a material
impact on the carrying value of the defined benefit obligation. Similarly,
inflation rates and mortality assumptions impact the defined benefit
obligation as they are used to model future salary increases and the duration
of pension payments. Whilst current assumptions use projected future inflation
rates and the most up to date information available on expected mortality, if
these estimates change, the defined benefit obligation could also change
materially in future periods.
Defined contribution schemes
The Group operates a defined contribution Group personal pension scheme for
the benefit of certain employees. The Group contributes to personal pension
schemes of certain Directors and senior employees. The Group operates a
stakeholder pension plan available to all employees. During the year, the
Group contributed £4.5m (2022: £4.4m) to these schemes.
Defined benefit schemes
The Group participated in 16 (2022: 17) principal defined benefit schemes on
behalf of a number of employees which require contributions to be made to
separately administered funds.
These pension schemes are operated on behalf of Mears Group PLC, Mears
Limited, Morrison Facilities Services Limited, Mears Extra Care Limited and
their subsidiary undertakings. The assets of the schemes are administered by
trustees in funds independent from the assets of the Group.
The Group schemes are no longer open to new members and have no particular
concentration of investments, so expose the Group only to typical risks
associated with defined benefit pension schemes including the risk that
investments underperform compared with movements in the scheme liabilities.
The Group has an unconditional right to a refund of any surplus within the
Group schemes and has therefore recognised those surpluses in accordance with
IFRIC 14
Management is aware of the High Court ruling in the case of Virgin Media Ltd v
NTL Pension Trustees II Ltd & Others, regarding amendments to benefits for
contracted out schemes. The Group is waiting for the outcome of an appeal
scheduled for June 2024, as well as confirmation from the Government as to
whether it intends to issue new regulations in response. The pension scheme
administrators and trustees have not as yet carried out a search or review of
historical actuarial certification dating back to 1997 and, as such,
management is not in a position to assess whether either Group scheme will be
impacted, or to quantify any impact. It remains unclear whether this case
could have an impact on the Other schemes in which the Group participates.
In certain cases, the Group will participate under Admitted Body status in the
LGPS. The Group will contribute for a finite period until the end of the
particular contract. The Group is required to pay regular contributions as
detailed in the scheme's schedule of contributions. In some cases, these
contributions are capped and any excess can be recovered from the body from
which the employees originally transferred. Where the Group has a contractual
right to recover the costs of making good any deficit in the scheme from the
Group's client, the fair value of that asset has been recognised as a separate
pension guarantee asset. Certain judgements around the value of this asset
have been made and are discussed in the judgements and estimates disclosure
within the accounting policies.
Upon exiting an LGPS, the surplus or deficit position of the scheme will be
calculated by the Scheme Actuary on a funding basis. This is a different basis
from IAS 19 and therefore may result in a different surplus or deficit
position. Where the scheme is in surplus on a funding basis on exit, the
pension authority has discretion over whether and to what extent the surplus
will be distributed to the outgoing employer.
The disclosures in respect of the two (2022: two) Group defined benefit
schemes and the 14 (2022: 15) other defined benefit schemes in this note have
been aggregated. Details of movements in pension guarantee assets are
presented in a separate table.
The costs and liabilities of the schemes are based on actuarial valuations.
The latest full actuarial valuations for the schemes were updated to 31
December 2023 by qualified independent actuaries using the projected unit
funding method.
The principal actuarial assumptions at the balance sheet date are as follows:
2023 2022
£'000 £'000
Rate of increase of salaries 2.80% 3.00%
Rate of increase for pensions in payment - based on CPI with a cap of 5% 2.40% 2.55%
Rate of increase for pensions in payment - based on RPI with a cap of 5% 2.70% 2.80%
Rate of increase for pensions in payment - based on CPI with a cap of 3% 2.00% 2.05%
Rate of increase for pensions in payment - based on RPI with a cap of 3% 2.15% 2.20%
Discount rate 4.50% 4.75%
Retail prices inflation 2.80% 3.00%
Consumer prices inflation 2.40% 2.60%
Life expectancy for a 65-year-old male* 21.0 years 21.5 years
Life expectancy for a 65-year-old female* 23.6 years 24.1 years
* This assumption is set on a scheme-by-scheme basis, taking into
account the demographics of the relevant members. The figures disclosed are an
average across all schemes.
The amounts recognised in the Consolidated Balance Sheet are:
2023 2022
Group Other Total Group Other Total
schemes schemes £'000 schemes schemes £'000
£'000 £'000 £'000 £'000
Quoted assets
Equities 1,473 45,399 46,872 - 59,914 59,914
Bonds 94,184 17,576 111,760 103,829 21,380 125,209
Property - 520 520 - 957 957
Pooled investment vehicles
Multi-asset funds 20,381 470 20,851 17,417 1,068 18,485
Alternative asset funds 2,724 - 2,724 4,783 78 4,861
Return seeking funds 1,923 784 2,707 2,035 746 2,781
Other assets
Equities - 14,507 14,507 - 14,447 14,447
Bonds - 4,121 4,121 - 4,004 4,004
Property 2,008 9,137 11,145 4,193 10,174 14,367
Derivatives 2,790 - 2,790 1,822 291 2,113
Cash and other 6,040 19,049 25,089 6,153 20,639 26,792
Investment liabilities
Derivatives (2,029) - (2,029) (12,209) (9) (12,218)
Group's estimated asset share 129,494 111,563 241,057 128,023 133,689 261,712
Present value of funded scheme liabilities (109,659) (83,342) (193,001) (104,351) (98,412) (202,763)
Pension surplus/deficit 19,835 28,221 48,056 23,672 35,277 58,949
Scheme surpluses not recognised as assets - (28,393) (28,393) - (38,413) (38,413)
Pension asset/(liability) recognised 19,835 (172) 19,663 23,672 (3,136) 20,536
Pension guarantee assets - - - - 3,136 3,136
The amounts recognised in the Consolidated Statement of Profit or Loss are as
follows:
2023 2022
Group Other Total Group Other Total
schemes schemes £'000 schemes schemes £'000
£'000 £'000 £'000 £'000
Current service cost 843 1,595 2,438 1,705 3,553 5,258
Settlement and curtailment - 58 58 - (242) (242)
Administration costs 347 - 347 409 - 409
Total operating charge 1,190 1,653 2,843 2,114 3,311 5,425
Net interest (1,162) (1,528) (2,690) (769) (464) (1,233)
Effects of limitation of recognisable surplus related to net interest - 1,528 1,528 - 643 643
Total charged to the result for the year 28 1,653 1,681 1,345 3,490 4,835
Actuarial gains and losses recognised in other comprehensive income (OCI) are
as follows:
2023 2022
Group Other Total Group Other Total
schemes schemes £'000 schemes schemes £'000
£'000 £'000 £'000 £'000
Return on plan assets in (below)/above that recorded in net interest (1,877) 7,741 5,864 (70,326) (25,802) (96,128)
Actuarial gain/(loss) arising from changes in demographic assumptions 1,840 202 2,042 8 (34) (26)
Actuarial (loss)/gain arising from changes in financial assumptions (2,058) (579) (2,637) 58,597 86,474 145,071
Actuarial loss arising from liability experience (3,671) (11,547) (15,218) (2,994) (737) (3,731)
Effects of limitation of recognisable surplus related to OCI movements - 4,428 4,428 - (48,227) (48,227)
Total (losses)/gains recognised in OCI (5,766) 245 (5,521) (14,715) 11,674 (3,041)
Changes in the present value of the defined benefit obligations are as
follows:
2023 2022
Group Other Total Group Other Total
schemes schemes £'000 schemes schemes £'000
£'000 £'000 £'000 £'000
Present value of obligations at 1 January 104,351 98,412 202,763 159,261 275,828 435,089
Current service cost 843 1,595 2,438 1,705 3,553 5,258
Interest on obligations 4,855 3,205 8,060 3,144 4,094 7,238
Plan participants' contributions 201 455 656 210 470 680
Benefits paid (4,480) (1,505) (5,985) (4,358) (6,407) (10,765)
Contract transfer - (30,284) (30,284) - (92,419) (92,419)
Settlements - (460) (460) - (1,004) (1,004)
Actuarial (gain)/loss arising from changes in demographic assumptions (1,840) (202) (2,042) (8) 34 26
Actuarial loss/(gain) arising from changes in financial assumptions 2,058 579 2,637 (58,597) (86,474) (145,071)
Actuarial loss arising from liability experience 3,671 11,547 15,218 2,994 737 3,731
Present value of obligations at 31 December 109,659 83,342 193,001 104,351 98,412 202,763
Changes in the fair value of the plan assets are as follows:
2023 2022
Group Other Total Group Other Total
schemes schemes £'000 schemes schemes £'000
£'000 £'000 £'000 £'000
Fair value of plan assets at 1 January 128,023 133,689 261,712 196,912 296,571 493,483
Expected return on plan assets 6,017 4,733 10,750 3,913 4,558 8,471
Employer's contributions 1,957 1,236 3,193 2,081 1,432 3,513
Plan participants' contributions 201 455 656 210 470 680
Benefits paid (4,480) (1,505) (5,985) (4,358) (6,407) (10,765)
Scheme administration costs (347) - (347) (409) - (409)
Contract transfer - (33,782) (33,782) - (136,371) (136,371)
Settlements - (1,004) (1,004) - (762) (762)
Return on plan assets (below)/above that recorded in net interest (1,877) 7,741 5,864 (70,326) (25,802) (96,128)
Fair value of plan assets at 31 December 129,494 111,563 241,057 128,023 133,689 261,712
Changes in the fair value of guarantee assets are as follows:
2023 2022
£'000 £'000
Fair value of guarantee assets at 1 January 3,136 12,975
Transferred in on scheme entry - 525
Transferred out on scheme exit (3,136) (4,768)
Recognised in the Consolidated Statement of Profit or Loss
Guarantee asset movement in respect of service cost 408 1,053
Guarantee asset movement in respect of net interest - 105
Recognised in other comprehensive income
Guarantee asset movement in respect of actuarial losses (408) (6,754)
Fair value of guarantee assets at 31 December - 3,136
Funding arrangements are agreed for each of the Group's defined benefit
pension schemes with their respective trustees. The employer's contributions
expected to be paid during the financial year ending 31 December 2024 amount
to £3.2m.
Each of the schemes manages risks through a variety of methods and strategies
to limit downside in falls in equity markets, movement in inflation and
movement in interest rates.
The Group's defined benefit obligation is sensitive to changes in certain key
assumptions. The sensitivity analysis below, prepared using the same methods
and assumptions used above, shows how a reasonably possible increase or
decrease in a particular assumption, in isolation, results in an increase or
decrease in the present value of the defined benefit obligation as at 31
December 2023. This analysis excludes the impact on pension schemes with a
guarantee in place as there would be no net impact on the balance sheet for
these schemes.
£'000 £'000
Rate of inflation - decrease/increase by 0.1% (1,766) 1,766
Rate of increase in salaries - decrease/increase by 0.1% (380) 380
Discount rate - decrease/increase by 0.1% 2,110 (2,110)
Life expectancy - decrease/increase by 1 year (5,480) 5,480
27. CAPITAL COMMITMENTS
The Group had no capital commitments at 31 December 2023 or at 31 December
2022.
28. CONTINGENT LIABILITIES
The Group has guaranteed that it will complete certain Group contracts that it
has commenced. At 31 December 2023 these guarantees amounted to £11.1m (2022:
£13.1m).
The Group had no other contingent liabilities at 31 December 2023 or at 31
December 2022.
29. RELATED PARTY TRANSACTIONS
Identity of related parties
The Group has a related party relationship with its pension schemes, its
subsidiaries and its Directors.
Pension schemes
Details of contributions to pension schemes are set out in note 26.
Subsidiaries
The Group has a central treasury arrangement in which all subsidiaries
participate. Management does not consider it meaningful to set out details of
transfers made in respect of this treasury arrangement between companies, nor
does it consider it meaningful to set out details of interest or dividend
payments made within the Group.
Transactions with key management personnel
The Group has identified key management personnel as the Directors of Mears
Group PLC.
Key management personnel held the following percentage of voting shares in
Mears Group PLC:
2023 2022
% %
Directors 0.3 0.5
Key management personnel's compensation is as follows:
2023 2022
£'000 £'000
Salaries including social security costs 1,783 1,714
Contributions to defined contribution pension schemes 56 134
Share-based payments 694 434
2,533 2,282
Further details of Directors' remuneration are disclosed within the
Remuneration Report.
Dividends totalling £0.04m (2022: £0.06m) were paid to Directors during the
year.
Transactions with other related parties
During the year the Group provided maintenance services to Pyramid Plus South
LLP, an entity in which the Group is a 30% member, totalling £12.1m (2022:
£10.2m). Pyramid Plus South LLP also made recharges of certain staff costs to
the Group totalling £0.2m (2022: £0.2m). At 31 December 2023, £1.4m (2022:
£1.0m) was due to the Group in respect of these transactions. Pyramid Plus
also owed the Group £0.1m (2022: £0.6m) in respect of agreed distributions.
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